CONSUMER INSTALMENT LOANS ANALYSIS BY PRINCIPAL TYPES OP LENDING INSTITUTIONS AND BY TYPES OP BORROWERS
DISSERTATION Presented In Partial PulfiIlment of the Requirements for the Degree Doctor of Philosophy In the Graduate School of The Ohio State Unlversi ty
By WINNIE DAVID ROBBINS, B.A.- M.B.A. 11 The Ohio State University
1953
Approved hys
^ *—*—• ^ Adviser ACKNOWLEDGEMENTS
I wish to express sincere appreciation to those who have contributed data for this study and to those who have given valuable assistance in its organization and develop ment. It is impossible to list here the names of all who have given generously of their time and knowledge to make this investigation possible. I am particularly indebted to the following firms, which cooperated, at considerable expense to themselves, in furnishing data or other assist ance for this study: Aetna Finance Company, St. Louis, Missouri American Investment Company of Illinois, St. Louis, Missouri American Securities Company, Marion, Indiana Associates Investment Company, South Bend, Indiana Beneficial Industrial Loan Corporation, Newark, New Jersey Capital Finance Company, Columbus, Ohio City Loan Company, Lima, Ohio Colonial Finance Company, Lima, Ohio Domestic Industries, Chicago, Illinois Family Finance Corporation, Wilmington, Delaware General Finance Loan Company, Chicago, Illinois Household Finance Corporation, Chicago, Illinois Interstate Finance Corporation, Evansville, Indiana Interstate Securities Company. Kansas City, Missouri Local Finance Company, Marlon, Indiana Local Loan, Chicago, Illinois Merchants Finance Company, Toledo, Ohio Pacific Finance Loans, Los Angeles, California Security Bankers Management Corporation, Wilmington, Delaware State Finance Company, South Bend, Indiana State Loan and Finance Corporation, Washington, D. C. Time Finance Company, Louisville, Kentucky Welfare Finance Company, Cincinnati, Ohio
il Bank of Manilattan, Now York City Bank of St. Louis, St. Louis, Missouri Boatman's National Bank, St. Louis, Missouri Central National Bank, Dos Moines, Iowa Central Trust Company, Cincinnati, Oiilo Chase National Bank, New York City Citizens &- Southern National Bank, Atlanta, Georgia Commercial National Bank of Peoria, Peoria, Illinois Fidelity Union Trust Company, Newark, New Jersey First National Bank, Omaha, Nebraska Franklin National Bank, Franklin Square, Long Island, New York Industrial Bank of Commerce, New York City Land Title Bank and Trust Company, Philadelphia, Pennsylvania La Salle National Bank, Chicago Manufacturers Traders Trust Company, Buffalo, New York Manufacturers Trust Company, New York City Marine Trust Company, Buffalo, New York Mellon National Bank and Trust Company, Pittsburgh, Pennsylvania Mercantile Trust Company, St. Louis, Missouri Michigan Avenue National Bank, Chicago National Bank of Detroit, Detroit, Michigan National City Bank, New York City Ohio National Bank, Columbus, Ohio Clifton National Bank & Trust Company, Passaic, New Jersey The Cleveland Trust Company, Cleveland, Ohio The First National Bank of Atlanta, Atlanta, Georgia The First National Bank of Saint Paul, Saint Paul, Minnesota The National City Bank, Cleveland, Ohio The National Shawnut Bank of Boston, Boston, Massachusetts lhe Peoples Bank, Youngstown, Ohio Security Trust Company, White Plains, New York State Bank of Toledo, Toledo, Ohio Winters National Bank I Trust Company, Dayton, Ohio Aluminum Ore Company Credit Union, East St. Louis, Missouri Arrow S. Credit Union, National Stock Yards, Illinois Battelle Memorial Institute Federal Credit Union, Columbus, Ohio ill Caterpillar Employees' Credit Union, Peoria, Illinois Farm Bureau Inauranoe Employees' Credit Union, Inc., Columbus, Ohio Lazarus Associates Credit Union, Columbus, Ohio Monsanta Chemical Company Credit Union, St. Louis, Missouri National Cash Register Company Employees' Credit Union, Dayton, Ohio Ohio Central Credit Union, Inc., Columbus, Ohio St. Louis Postal Employees' Credit Union, St. Louis, Missouri The Cleveland Telephone Employees* Credit Union, Cleveland, Ohio Finally, I wish to extend thanks to Professor Theodore N. Beckman who gave constant guidance and constructive crit icism at all stages of the study and who has been a constant source of assistance and inspiration.
IN. D. Robbins
Iv TABLE OF CONTENTS
Chapter Page I Introduction ...... 1 II Competitive Status of the Principal Consumer Instalment Lending Institutions ...... 21
III Consumer Instalment Loan Characteristics.... i+8
IV Characteristics of the Borrowers of Consumer Instalment Loan Funds...... 86
V Source of Loan Applications and Intended Use of Loan Funds ...... 121 VI Analysis of Loan Accounts Charged Off As Losses ...... li+i* VII Summary and Conclusions ...... 179
Bibliography ...... • < 196
Appendix A ...... 203 Appendix B ...... 207 Appendix C ...... 208
Appendix D ...... 214
Appendix E ...... 215 Appendix F ...... 216
Appendix G ...... 217 Appendix H ...... 2l8 Appendix I ...... 219
Appendix J ...... 220 Appendix K ...... 221 Appendix L ...... 222
▼ LIST OP TABLES Table Page 1 Disposable Personal Income, Personal Consumption Expenditures, Consumer Instalment Loans, and Personal Savings, I9 2 9 -I95I ...... 22
2 Distribution of Spending Units, by Size of Liquid Asset Holdings, 1947“1951 ...... 28
3 Consumer Instalment Loans, 1929-1951 ...... 30 4 Per Cent of Consumer Instalment Loans By Type of Lending Institution, 1929-1951 ..... 33
5 Personal Instalment Loans, 1939*"1951...... 37
6 Per Cent of Personal Instalment Loans By Type of Lending Institution, 1939”1951 ..... 1*1 7 Distribution of Numbers of Loans and Amounts of Loans in Thousands of Dollars Made by Personal Finance Companies In Twenty-five States, 1950 ...... 53
8 Classification of Loans Made by Personal Finance Companies on the Basis of the Size of the Loan, Chain and Independent Companies Compared, State of Ohio, 1950 .... 6 1 9 Classification of Loans on the Basis of the Size of the Loan By the Principal Types of Consumer Instalment Lending Institutions, 1950-1951 ...... 65
10 Distribution of Numbers of Loans and Amounts of Loans In Thousands of Dollars Made by Personal Finance Companies in Twenty-four States, By Type of Security, 195° ...... 69 11 Classification of Personal Finance Company Loans by Type of Security, Chain and Independent Companies Compared, State of Ohio, 1 9 5 0 ...... 73
12 Classification of Loans by Type of Security by the Principal Types of Consumer Instalment Lending Institutions, 1950”^-951 ...... 75 vi Table Page
13 Average Size of Loan by Type of Security by the Two Principal Types of Consumer Instalment Lending Institutions,1951 ...... 79
14 Classification of Loans by Contractual Maturity by the Principal Types of Consumer Instalment Lending Institutions, 1950-1951 ...... 82
15 Average Size of Loan by Contractual Maturity by the Two Principal Types of Consumer Instalment Lending Institutions, 1951 ...... 85 16 Occupation of Borrowers From the Principal Types of Consumer Instalment Lending Institutions, 1 9 5 0 - 1 9 5 1 ...... • ...... 87
17 Comparison of the Percentage Distribution of the Occupations of the Experienced Civilian Labor Force For the United States and the Percentage Distribution of the Occupations of the Borrowers from the Principal Types of Consumer Instalment Lenders, 1950-1951 ..... 93 18 Average Size Loan by Occupation of Borrower, 1951 ...... 95
19 Monthly Income of Borrowers From the Principal Types of Consumer Instalment Lending Institutions, 1 9 5 O-1 9 5 I ...... 99 20 Average Size Loan by Monthly Income of Borrower, 1951 ...... *...... 102 21 Average Size of Loan Compared to the Average Monthly Income of Borrowers In Each Income Class by Six Large Personal Finance Companies, 1951 ...... 105 22 Age of Borrowers From the Principal Types of Consumer Instalment Lending Institutions, 1950-1951 ...... 113 23 Sex and Marital Status of Borrowers From the Principal Types of Consumer Instalment Lending Institutions, 1950-1951 ...... 117 vil Pag©
Source of Applications for Consumer Instalment Loans by the Principal Types of Lending Institutions, 1950-1951 ...... 123 Loans Made to Present Borrowers In State of New Jersey by Number of Renewals, 1 9 5 0 ...... 125 Analysis of Former Borrower Activity, 1951 • 129
Distribution of Loans by Intended Use of Loan Funds by the Principal Types of Consumer Instalment Lending Institutions, 1950-1951 ...... 132
Analysis by Months of Intended Use of Loan Funds by the Borrowers From One Large Personal Finance Company, 195® ...... 136 Average Size Loan By Intended Use of Loan Funds, 1951 ...... 138 Suits, Possessions, and Sale of Chattels by Personal Finance Companies Operating in Seventeen States, I9 5O ...... ±k7 Classification of Loans on the Basis of the Size of the Loan by the Principal Types of Consumer instalment Lending Institutions Comparing Loans Granted With Loans Charged to Profit and Loss, 1 9 5 0 - 1 9 5 1 ...... 151 Comparison of the Occu{& tion of Borrowers of Consumer Instalment Loan Funds with the Occupation of Borrowers of Loans Charged to Profit and Loss by the Princi pal Types of Lending Institutions, 1950-1951 ...... 138 Comparison of the Monthly Income of Borrowers of Consumer Instalment Loan Funds with the Monthly Income of Borrowers of Loans Charged to Profit and Loss by the Principal Types of Lending Institutions, 1950-1951 ...... 16I4. viii Page Comparison of the Sex and Marital Status of Borrowers of Consumer Instalment Loan Fluids with the Sex and Marital Status of Borrowers of Loans Charged to Profit and Loss by the Principal Types of Lending Institutions, 1 9 5 0 - 1 9 5 1 ...... 16Q Classification of Loans by Intended Use of Loan Funds by the Principal Typas of Consumer Instalment Lending Institutions Comparing Loans Granted with Loans Charged to Profit and Loss, 1950-1951 ...... ^7° Comparison of New, Present, and Former Borrowers of Consumer Instalment Loan Funds with the New, Present, and Former Borrowers of Loans Charged To Profit and Loss by the Principal Types of Lending Institutions, 1950-1951 ...... ^ 5 LIST OP CHARTS
Chart I Consumer Instalment Loans, Disposable Personal Income and Personal Consumption Expenditures, 1 9 2 9 - 1 9 5 1 ......
II Consumer Instalment Loans and Personal Savings, 1929-1951 ......
Ill Consumer Instalment Loans, Loans Made by Principal Types of Lending Institutions, I9 2 9-I9 5I ...... IV Consumer Instalment Loans, By Type of Lending Institution, 1929-1951 (Total each year, 1 0 0 per cent) ......
V Personal Instalment Loans, Loans Made by Principal Types of Lending Institutions, I9 3 9-I9 5I ......
VI Per Cent Increase In Personal Instalment Loans By Type of t-ending Institution, I9 3 9-I9 5I ......
VII Personal Instalment Loans, By Type of Lending Institution, 1939-1951 (Total each year, 100 per cent) ......
VIII Classification of Personal Finance Company Loans on the Basis of the Size of the Loan, Chain and Independent Companies Compared, State of Ohio- 1 9 5 0 ......
IX Classification of Loans on the Basis of the Size of the Loan by the Principal Types of Consumer Instalment Lending Institutions, 1950-1951 ...... X Classification of Loans By Type of Security by Personal Finance Companies in Twenty- four States, 1950 ......
XI Classification of Loans by Type of Security By The Principal Types of Consumer Instalment Lending Institutions, 1950-1951 ...... Chart Page
XII Classification of Loans by Contractual Maturity By The Principal Types of Consumer Instalment Lending Institutions, 1950- 1 9 5 1 ...... 85 XIII Percentage Distribution of the Occupation of Borrowers From The Principal Types of Consumer Instalment Lending Institutions, 1950-1951 ...... 88 XIV Average Size Loan By Occupation of Borrower, 1951 ...... 96 XV Percentage Distribution of Borrowers By Monthly Income From the Principal Types of Consumer Instalment Lending Institutions, 100 1950-1951 ...... XVI Average Size Loan By Monthly Income of Borrower, 1951 ...... 10J XVII Average Size of Loan Compared To The Average Monthly Income of Borrowers In Each Income Classification, By Six Large Personal Finance Companies, 1951 ...... 106
XVIII Percentage Distribution of Borrowers By Age, From The Principal Types of Consumer Instal ment Lending Institutions, 1 9 5 Q-1 9 5 I ...... Hil XIX Percentage Distribution of Loans By Intended Use of Loan Funds By The Principal Types of Consumer Instalment Lending Institutions, 1 9 5 0 - 1 9 5 1 ...... 133 XX Average Size Loan By Intended Use of Loan Funds, 1951 ...... 139 XXI Classification of Loans on the Basis of The Size of the Loan By the Principal Types of Consumer Instalment Lending Institutions Comparing Loans Granted With Loans Charged to Profit and Loss, 1950-1951 ...... 152 xi Chart Pago
XXII Comparison of the Occupation of Borrowers of Consumer Instalment Loan Funds with the Occupation of Borrowers of Loans Charged to Profit and Loss by the Principal Types of Lending Institutions, 1950-1951 ...... 159
XXIII Comparison of the Monthly Income of Borrowers of Consumer Instalment Loan Funds with the Monthly Income of Borrowers of Loans Charged to Profit and Loss By the Principal Types of Lending Institutions, I95O-I95I ...... 165
XXIV Classification of Loans by Intended Use of Loan Funds by the Principal Types of Consumer Instalment Lending Institutions Comparing Loans Granted With Loans Charged To Profit and Loss, I95O-I95I ...... 171 CONSUMER INSTALMENT LOANS ANALYSIS BY PRINCIPAL TYPES OF LENDING INSTITUTIONS AND BY TYPES OF BORROWERS
CHAPTER I INTRODUCTION
Consumer credit is an integral part of American life. Wisely used, it serves well. Credit used by con sumers for their personal needs consists mainly of the three following types: retail charge account credit.
Instalment sales credit, and loans of cash. Cash credit Includes single payment loans and loans repayable in
Instalments. In recent years, consumer instalment loans have become increasingly important in our economy. Although the borrowing of money for consumption purposes has attained social acceptability, there are still many people who do not appreciate the vital Importance of the consumer loan function. Individuals, like businesses and governments, face emergency conditions that require more money than is available at the moment. There are also times, aside from emergency needs, when borrowing is an advantage to the consumer. The immediate requirement calling for a cash payment may be one of a number of the ordinary requisites of life, such as hospital or medical care, food, clothing, rent, taxes, furniture, education, and the like.
Since many personal loans are obtained under 1 2 pressure or great urgency, the borrower Is willing to pay almost any charge for the use ot the money borrowed* Be cause of the relatively weak bargaining position of the borrower, elements of monopolistic competition are strong er In the short-term consumption loan market than In other loan markets* Though large in number, the small loan^ borrowers have in the past been a rather helpless group* They are 2 still virtually unprotected In fourteen states where no effective small loan legislation has been enacted. In those states there are relatively few lawful lenders due
to the fact that the limitations Imposed by existing usury
statutes specifying the maximum rate of interest which may be charged have tended to exclude lawful enterprises
from the small loan field* Consequently, the small loan borrowers In such states often must obtain loan funds from
Small loans or "personal loans," as these terms are ordinarily used, refer to cash credit, extended or received In amounts generally not exceeding five hundred dollars* 2 The states of Kansas, Montana, North Dakota, South Dakota, and South Carolina do not have any special small loan legislation; they have only general usury statutes* The states of Alabama, Arkansas, Delaware, Georgia, Mississippi, North Carolina, Tennessee, Texas, and Wyoming have some type of small loan statute, but such statutes are, for one reason or another, largely ineffective. Of the remaining thirty-four states, thirty- two states have effective small loan legislation. The states of New Mexico and Oklahoma have small loan legis lation which may be classed as partially effective* 3 unscrupulous lenders, thereby paying not only the legit imate costs or the loan and a fair profit to the lender, but also what is referred to as the "cost of outlawry." The consumer finance business as It exists today Is the product of legislative attempts by the states to combat
the "loan shark" evil. The necessity for such legislative action is set forth In the text of the statutes of some of
the states which have enacted effective small loan laws.
The need for and purpose of such legislation is well illus
trated by the following statements in the first section
of the Small Loan Law of the State of Idaho:^
SECTION 1, NECESSITY FOR LAW: For the purpose of interpretation of this act the Legislature of the State of Idaho Is mindful of the follow ing facts:
Many people of moderate Income and who have no established credit will find it necessary to borrow comparatively small sums of money to meet emergencies and unexpected demands. The Legisla ture of Idaho recognizes the necessity for an adequate small loan service for such borrowers and it desires to provide the necessary safe guards for the establishment of institutions, from which small sums of money, or credit, may be procured in an orderly manner and to the welfare of such borrowers. In the Interest of and for the protection of such borrowers it is deemed expedient and proper that such lending institutions shall be placed under strict regulations of the State of Idaho, as herein after set forth.
3 Small Loan Law of the State of Idaho. Chapter 55* Session Laws of 195-3, p. 105* k
Without proper regulatory legislation* numerous Ingenious devices and subterfuges may be employed by lenders to effect the collection of exorbitant interest and unconscionable charges and fees from borrowers, against which such borrowers, because of their lack of re sources , are unable to protect themselves.
It is therefore the intent of the Legisla ture, by the passage of this Act, to provide a method by which regulated lending institutions may be established on a fair and reasonable bails to the borrowers and lenders alike.
Because the nature of the entire short-term con sumption loan market is a subject clouded by confusion and lack of information, this analysis undertakes to pro mote a better understanding of consumer instalment loans and of the characteristics of the borrowers of such loans. Consumer instalment loans made by the three principal types of lending institutions -- personal finance companies, instalment loan departments of commercial banks, and
credit unions — are the scope of the present study. Be
cause there is less understanding by the general public of the operation of personal finance companies than of
commercial banks and credit unions, relatively more em
phasis is devoted to an analysis of loans and borrowers of personal finance companies.
Personal finance companies, sometimes called small loan companies, consumer finance companies, or Just licensed lenders, are individuals, partnerships, and
corporations which have been licensed by the state to 5 engage In the business of making small loans to Indlviduala.
The state laws In those states which have effective small loan legislation rigidly prescribe the powers of the licensees and the limitations under which they operate and subject them to examination and regulation. Civil and criminal penalities as well as revocation of licenses are prescribed for violations of the statutes or regulations.
In the commercial banking field, only those banks which have a separate personal instalment loan department are included in this study. The third type of Institution that is examined is
the credit union. A credit union is a cooperative
association in which the members invest their savings and the groupfs savings are made available to its own members
in need of loan funds. Generally, credit unions serve
persons who constitute a clearly defined group and have
a strong common Interest. For example, membership may be limited to employees of the same business establish ment, members of a labor union, members of a governmental
unit, members of a fraternal order, or members of a
particular church. An important limitation of the credit union is that loans may be made only to members.
Historical Background of Instalment Lending
Our earliest historical records reveal the continu- Ing plight of the necessitous borrower.^ History demon strates that the demand for small loans exists whether or not a lawful means of satisfying It Is present. Not until the twentieth century, however, were ef fective principles developed for making cash credit avail able on fair terms to the consumer borrower* In 1 9 0 8 , the Russell Sage Foundation, a philanthropic research agency working for the improvement of social conditions, created the Division of Remedial Loans to study the problems in volved in making small loans, with particular emphasis upon the possibilities of legal regulation. In 1911. Massachu setts pioneered with the first comprehensive and workable system of small loan regulation. New Jersey followed in
1914* and New York, Ohio, and Pennsylvania in 1915* The best solution to the problem came with the drafting of the
Uniform Small Loan Law In 1 9 1 6 after eight years of study of the small loan business by the Division of Remedial Loans of the Russell Sage Foundation. The principal purpose of the law was to provide safe facilities for the small borrower• The Uniform Small Loan Law provides for regulation of the business of making loans of $ ^ 0 0 or less and
^ For an excellent presentation of the long history of borrowing, see Robert W. Kelso, Social Background of the Small Loan Business In the Uni ted 5ta tes (Ann Arbor, Michigan: The University of infchigan Press, 1 9^4-8 ), Chapter I. 7 specifies a maximum rate of Interest at which such loans can be made on a business basis to persons having no other security than household goods or the expectation of regu lar wages* The basic principles of the 1916 Uniform Small Loan Law were as follows:
(1) Licensing* regulating, and supervising by
the state of the business of making consumer instalment loans;
(2 ) Establishing the maximum size of loans; (3) Establishing the rate of a single all- inclusive charge and prohibiting all other fees* service charges, fines, or penalties; and
(Ij.) Protecting the borrower against unfair
practices by requiring full disclosure to the borrower of all terms, repayment requirements, and rights*
Since 1 9 1 6 , improved drafts of the model Small Loan
Law were recommended by the Russell Sage Foundation in 1 9 1 8 ,
1 9 1 9* 19^2* 1952, 1935# and 19^2. Today, the statutes of thirty-two states follow generally the pattern of the Uniform Small Loan Law. Most of the small loan statutes in these thirty-two states resemble the particular draft which was recommended by the Foundation at the time of 8 the enactment of the respective statutes.^
Prom the inception of the Division of Remedial Loans of the Russell Sage Foundation, an important part of their study vas the contribution that could be made by credit unions. Although the Foundation recognised that the scope of the credit union and the places where it could operate successfully were limited, credit unions received generous and vigorous support from the Division of Remedial Loans beginning about 1910. The passage of the Massachusetts
Credit Union Law in 1909 wa* the opening wedge of formal credit union development in the United States. The passage of the New York Credit Union Law in 1915* drafted by the
Russell Sage Foundation, was the second enactment of credit union enabling legislation. Credit union legislation has now been extended to forty-four states, and today a credit union may also be chartered under federal law in £ any state or territory of the United States. In the very eventful period of the early 1900*s, the industrial bank also came into existence. An Industrial bank is a financial institution which invests its funds
^ A brief description of the consumer finance laws of the several states is presented in Appendix A*
^ A summary of credit union laws showing the un secured loan limit and the secured loan limit by states is presented in Appendix L. 9 chiefly In personal loans and which obtains, or is author ized to obtain, its funds from individual savers, either through the acceptance of deposits or the sale of invest ment certificates.^ The first industrial bank was organized in Norfolk, Virginia in 1910 by Arthur J. Morris, and from that date the movement developed rapidly, with many such institutions operating on the so-called "Morris Plan."
The heart of the Industrial banking idea was its method of meeting the problem of the usury laws. The in dustrial bank could make loans to consumers at an effective rate of interest almost double the lawful rate, merely by providing that repayments would be credited to a deposit p or investment certificate account rather than to the loan.
The principal amount of the loan remains the same but the borrower makes instalment payments into a savings account which does not bear interest. The industrial bank has proved to be a valuable, although quantitatively minor,^ instrument in the extension of credit on a fair basis to the borrower. Depending upon the character of the present state law under which Industrial banks operate, they differ
7 ' Edward E. Edwards, "Consumer Credit Institutions Other Than Commercial Banks," American Financial Institu tions ; (New York; Prentice-HalT][ inc., 1^1), pT 751* 8 Ibid., p. 732. 9 See Tables 3 and 3 of Chapter II. 10 widely In the nature and extent of their activity* After an extensive study by one authority of the changes in industrial banks from 1 9 3 4 to 1 9 4 7 * the conclusion was reached that In a very real sense the Industrial bank is fast disappearing as a clearly distinguishable type of 10 financial Institution* Dauer further states, „"The balance sheets of industrial banks are very similar to those of mil the general run of commercial banks." Commercial banks did not become actively interested in the consumer instalment lending field until the late 1930*8. Before this time practically all banks did make some loans on a short term discount basis to persons who had adequate security in the form of real estate, stocks, or bonds, but only a very small percentage of consumers could meet these requirements* Although there are no re liable statistics available as to the number of banks which were making consumer instalment loans prior to 1 9 3 4# it is probable that they numbered less than five hundred
The first large commercial oank that established a depart- ns------Ernst A* Dauer, ttRadlcal Changes In Industrial Banks," Harvard Business Review, Vol. XXV, No* 4®# P* 6 2 4 .
11 Ibid** p* 6 0 9. 12 Walter B* French, "Consumer Instalment Credit in Commercial Banks," American Financial Institutionst (New York; Prentice Hair, inc., p. bbj. 11 ment to supply Instalment credit for consumer needs was the National City Bank of New York In 1928. The following year the Bank of America in San Francisco, California, with branches serving the entire state of California, entered this new field
The change in the attitude of commercial bankers may be attributed to the pressure of special circumstances.
Bank earnings from loan and investment portfolios declined steadily at the same time that banks amassed unprecedented holdings of excess reserves. Commercial banks were earnest ly seeking new horizons. Nevertheless, it was not until after I95lj- that most banks received their first effective introduction to consumer Instalment credit through repair and modernization loans. Through the Federal Housing
Administration, created by the National Housing Act enacted August 10, 195iu banks could be insured against losses on mortgage loans and advances of credit made by the banks for the purpose of financing improvements to homes and other real property. Commercial banks learned from their experience with Insured loans that consumer instalment financing provided an outlet for bank resources and pros pects of higher returns than were available elsewhere.
15 Ibid., p. 682. Purpose of Study
The central purpose of this Investigation Is to fur ther the understanding of the nature and purposes of con sumer Instalment loans and the characteristics of the borrowers. A comparison will be made of borrower charact eristics and loan characteristics with respect to each of the three principal types of lending Institutions for the purpose of determining who their respective borrowers are and the service that each Institution is performing in the community. Examination of the characteristics of loans which had been charged to profit and loss and of the persons who had failed to repay consumer instalment loans was made In anticipation of uncovering factors which deserve more careful attention by lenders in the field of consumer Instalment financing.
Scope of This Investigation
As previously indicated, consumer Instalment loans made by the three principal types of lending institutions personal finance companies, instalment loan departments of commercial banks, and credit unions -- constitute the scope of this investigation. In the commercial banking field, the only banks selected for Inclusion in this study were those which maintain special departments or separate files with respect to personal Instalment loans. In this 13 field* analysis vas confined to personal Instalment loans*^ as distinguished from the more comprehensive consumer In stalment loans* so that the data presented would be on a comparable basis with those obtained from personal finance companies and from credit unions. Such procedure was con sidered advisable because more than 73 P®1* cent of the volume of consumer Instalment loans of personal finance companies and approximately 6 0 per cent of credit union loans consist of personal instalment loans. On the other hand* less than i+5 per cent of the volume of consumer in-
1 5 ------As the terms "personal instalment loans" and "consumer instalment loans" are used in general practice* by authors in the consumer credit field* and in Federal Reserve consumer credit statistics* "consumer instalment loans" is the more inclusive term and includes retail auto mobile direct loans* other retail direct loans, as well as personal Instalment loans. Consumer instalment loans are loans made by cash lending agenciesto individuals In their capacity as consumers in exchange for a promise to pay in two or more instalments sometime in the future. Although mortgage loans might be construed as falling with in this definition* as a matter of practice* they are ex cluded. Personal Instalment loans* one type of consumer instalment loan* are cask loans made to individuals for such purposes as medical expenses* education expenses* consolidation of debt* vacation expenses* taxes* and gener al personal expenditures. To illustrate the above* loans made to individuals to purchase automobiles or household goods could be considered as consumer instalment loans but could not be construed as personal instalment loans. If the borrower uses the proceeds of the loan to pay old debts* to meet emergency expenses* or any other personal need, exclusive of direct loans to purchase automobiles or other retail direct loans* the loan would be classified as a P"r*onal Instalment loan. The most important distinction between consumer Instalment loans and personal instalment loans is that the former term Includes loans made to in dividuals to purchase automobiles* whereas the latter term doss not Include automobile loans. 14 stalment loans of commercial banks consists or personal Instalment loans
Analysis or the loans made by the three principal types or lending institutions is presented, classiried according to the size or the loans, security required, and contractual maturity. The major borrower characteristics analyzed are occupation, income, age, sex, and marital status or the borrowers, and their Intended use or loan runds thus obtained.
Geographically, this study Includes eighteen person* al rinance companies operating 2,262 o m c e s located in thirty-eight states,^ twenty-two commercial banks located 17 in ten states, 1 and seven credit unions located In two ig states. InTormation concerning loan characteristics and borrower characteristics rrom 7 ,8 2 5 ,6 6 0 individual con sumer instalment loans is Included in this study. The number or loans from each or the principal lenders pertain ing to the particular ractor analyzed la stated; the number or loans, however, ror each ractor analyzed, dirrers. For
33------See Tables 3 and 5 or Chapter II. or the rorty-eight states, Alabama, Delaware, Georgia, Kansas, Mississippi, Montana, North Carolina, South Carolina, North Dakota, and South Dakota were excluded ror the reason that rew lawrul personal rinance companies operate in such states. *7 Georgia, Illinois, Massachusetts, Minnesota, Missouri, New Jersey, New York, Ohio, Pennsylvania and Virginia. Illinois and Ohio. 15 some institutions it was Impractical to include all factors since the necessary Information was not recorded on all loan applications* On a more restricted basis* an analysis is presented of loans which had been charged to profit and loss 19 from each of the three principal types of lending institutions* Essentially the same loan characteristics and borrower characteristics will be analysed with respect to loans charged to profit and loos as mentioned on the preceding page.
Sources of Data and Methods of Analysis
Certain of the methods of analysis and sources of data have been Indicated* As previously mentioned* the principal source for all data presented in this investiga tion was the application for loans used by lenders to record essential Information concerning the prospective borrower* Another important source of information consist ed of the annual reports of the state banking departments
19' There is a wide variation in policy among firms as to the time when a loan should be charged to profit and loss* All such loans analysed* however* were loans which had entailed serious collection difficulties and in prac tically all cases were at least 90 days delinquent. In a few Instances loans were charged off as losses because of a change in the borrower's status which definitely presaged a long interruption or a complete breakdown of the princi pal payments * 16 which publish Information concerning the operation of
licensed personal finance companies.
The particular lenders for use In this study were
chosen primarily from suggestions offered by the follow
ing associations3 American Bankers Association* National
Consumer Finance Association* The Ohio Association of
Small Loan Companies, and The Ohio Central Credit Union*
Inc. In cooperation with the Deputy Manager and the
Secretary of the Committee on Consumer Credit of the Ameri
can Bankers Association* fifty commercial banks were
chosen which were known to be active in the consumer in
stalment loan field and which, it was believed, would be
cooperative and interested in this type of investigation.
After personal interview* in practically all cases with
the loan officers In charge of instalment lending, twenty-
two banks were selected. The choice of these twenty-two
banka was based primarily on willingness to cooperate and
on feasibility of deriving essential information from exist
ing loan records.
All of the larger personal finance companies in the
nation were solicited for their cooperation. Eighteen
personal finance companies were eventually selected. Dur
ing 1951 these eighteen chain organizations operated 2 ,2 6 2 offices located In thirty-eight states. The choice here
was also based primarily on willingness to cooperate, and 17 availability of desired Information. The headquarters of all of the chain offices of these eighteen personal finance companies* with one exception* were visited and the purpose and plan of the study was explained to the officers. The
Information that was received from many of these personal finance companies* as well as from many of the cooperating commercial banks* was made available at considerable expense to themselves.
In the credit union field* after personal interview with the managers of some twenty organizations* seven organizations were selected. These represented the follow ing fields of industry; heavy Industrial machinery manu facturing* office machines manufacturing* retailing*
Insurance* meat packing* and communications.
The information received from eleven of the personal finance companies and four of the commercial banks was derived from International Business Electronic Statistical
Machine cards* which information had been compiled at the home offices of such lending institutions at the time the loans were made. Information was derived from these Inter national Business Machine cards for all consumer instal ment loans which had been made by such lending institutions during either 1 9 5 0 or 1951 *nd* in several cases* during both years. 18
For the other cooperating firms. It was necessary to derive Information by sampling methods. Where it was feasible and time permitted, a sample was taken from every
fifth loan application. The first application was select ed at random from the first five applications and the
information from every fifth application thereafter was
tabulated.
In larger chain organizations, an analysis of one- fifth of all loan applications was Impractical and not
necessary to achieve an adequate sample. In most multi
unit organizations, the loan applications were filed sep
arately by each operating office. A random sample was taken from each operating unit approximately proportional to the
size of the unit in the population. When loan applications
were numbered In consecutive order, as was the general practice, reference was made to random numbers 20 to select
the loan applications for analysis from each operating
office. In testing for the reliability of the sample,
that is. In making sure that sufficient cases were included in the sample to eliminate the possibility of distortion due to the size of the sample, the cumulative frequency
method was used. After the Information from one hundred ------2(5------Ronald A. Fisher and Frank Yates, Statistical Tables. (New York, Hafner Publishing Company7 Tine., I9J+8 ) p p . i 0^-1 0 9 . 19 loan applications was tabulated, a count was made of the frequency with which the phenomenon being measured occurred, and the percentage of occurrence was determined. This process was repeated after the information from each one hundred loan applications was tabulated, and the cumulative percentage of occurrence was determined. When It became evident by charting the cumulative frequencies that the addition of more cases would not materially increase the accuracy of the sample. It was decided that the sample possessed the desired consistency and stability. The in formation from at least three hundred loan applications was tabulated for every firm where this method was employed, and in no case was it believed necessary to tabulate the information from more than five hundred loan applications.
Limitations and Weaknesses
On the basis of the twenty-two commercial banks in the personal instalment loan field Included in this study, it is impossible to determine how representative the sample is of the activity of commercial banks throughout the nation. Each of these b*nks had a separate Instalment loan department and maintained special files for its personal instalment loans. The statistical picture that is pre sented of the activity of commercial banks is certainly not representative of the small commercial banks or of 20 the larger commercial banka which do not have a separate instalment loan department for the handling of such loans.
In the credit union field only seven organizations were included, representing activity in six fields of in dustry. This sample is not representative of very small credit unions but is believed to present a typical picture of the activity of the larger ones. CHAPTER II
COMPETITIVE STATUS OP THE PRINCIPAL CONSUMER INSTALMENT LENDING INSTITUTIONS
Before considering the competitive status of the principal lending institutions. It is advisable to ascer tain the nature of the behavior of consumer Instalment loans In relation to changes in the national economy on the consumer level* This is necessary for two major reasons: first, to show the fallacy of the belief that consumer In stalment lending is a depression business, and second, to emphasize the close harmony of consumer instalment loans with the economic framework of the time.
Data regarding disposable personal income, personal consumption expenditures, and consumer instalment loans are presented in Table 1. From these data, as depicted on
Chart I. it is seen that disposable personal income, per sonal consumption expenditures, and consumer instalment loans declined from 1 9 2 9 through 1 9 3 5 with consumer instal ment loans declining less rapidly. Fewer cash loans were made during the depression years, not because of less need for consumer instalment loans, but because of decreased disposable personal income out of which consumer instal ment loans are to be repaid. After 1953 disposable person al Income, personal consumption expenditures, and consumer instalment loans began their upward movement, but the 21 TABLE I
M V O N I U K M O M l IMCOItE,' PCMOMAl QOSSUNPTIOM EXPENDITURES,1 CONSUMER INSTALMENT LOAMS, AMO PERSONAL SAVINRS (IAo m Ay m m m U la allliM t of dollar* aod Ay I M l coo, ISM - IMS * 100)
Disposable Personal Conraar Personal Constant Ion Inetalaent Personal Is s z ... IBSS* Expenditure* Index S*rlnxtd lltiS IQ29 f 92,494 124.9 t 78,761 123.9 « 1,148 54.4 1 3,723 144.0 1O10 111.4 7C.789 111.4 1,130 55.5 2,899 112.1 1°?1 95.2 61,153 96.2 1,063 52.2 1,824 70.6 m 2 4,\819 72.3 49,208 77.4 812 39.9 (-1.389) (-53.7) 1973 45.155 68.3 46,346 ’’2.9 669 32.8 (-1,181) (-45.7) I1™.', 51/35 9#.l 51,882 81.6 8?7 44.1 (-247) (-9.6)
1^5 5 ", 97? 87.6 56,215 88.4 1,344 66.1 1,758 68.1 99.9 62,515 9«.3 1,929 94.8 3,580 138.5 91/55 107.4 67,121 105.6 2,045 100.5 3,934 152.2 1938 65,465 99.0 64,513 101.5 2,170 106.6 952 36.8 1939 70,14? 106.1 67,466 106.1 2,686 132.C 2,701 105.5
19 40 ‘T5»?43 114.5 72,052 113-3 3,293 161.8 3 /9 1 142.8 1941 92,015 139.1 82,255 129.4 3,631 178.4 9,760 377.6 l%2 116 .UO 176.5 *1,161. 143.4 2,700 132.7 25,579 989.5 1943 132,441 200.2 102,244 160.1 2,360 116.0 30,197 1,168.2 1944 144,95? 222.2 111,550 175.5 2,548 125.2 35.4C7 1,369.7 1945 151,040 228.4 123,079 193.4 2,947 144.8 27,981 1,082.4
1946 158,91* 240.2 146,907 231.1 4,593 225.7 12,009 464.6 19'^ 169,494 254.2 165,570 260.5 4,401 314.6 3,924 151.8 1949 188,352 294.7 177,890 279.9 7,442 365.7 10,462 4C4.7 1949 186,42" 291.9 180,174 283.4 8,132 399/ 6,253 241.9 195'’ 204,261 308.8 193,568 304-5 9,255 454.8 10,693 413-7 1951 222,600 336.5 205,500 323.3 10,485 515.3 17,20C 665.4
Soorco: a Metionai /ew e 1032 ftfffloo—4 Aoyieotnt to t** Annoy o/ Currmt Business,y. 151 for the yoort ltH-1951 ood Kerch, 1952 A nQ f Of CtUTMt Business, ». S-l for the year 1951.
* Fedent Reserve Atf<#tlfl, February, IMS, a. 228 aad Aon), 1*52, o. 998. c Table 3. 10 10 * Battceai foam, op. c tt., ». lS2—for the yeers 1329-1950 and Kerch, 1*52 Survey of Currmt Business for the yoor IMI. 2?
CHART I
CONSUMER INSTALMENT LOANS
DISPOSABLE PERSONAL INCOME AND PERSONAL CONSUMPTION EXPENDITURES
1929 - 1951 (1935 - 1939 - 100)
INOCX
5 0 0
4 0 0
5 0 0
200
IOO
51 5 5 5T 5 0 41 4 5 4 5 4 T 4 5 51 Increase in consumer Instalment loans after this date pro ceeded at a faster pace than the increase in disposable personal Income or personal consumption expenditures.
This relative Increase, continuing until the end of 19^A» was followed by a different pattern of behavior during the war years. Disposable personal income and personal con sumption expenditures continued their climb with disposable personal income increasing at the faster rate, while con sumer instalment loans declined from I9 I4J. until bottom waa reached in 19k5- During 19Mj- *nd 3-9U5* tk® three followed the same pattern with each Increasing at about the same rate. Following 19^5# increase continued; however, from this date to the present it is very important to ob serve the rate of increase. The increase in consumer
Instalment loans since the termination of World War II has proceeded at a much faster pace than the Increase in disposable personal income or consumer consumption expend itures •
The most Important principle derived from Chart I is that under normal conditions, as disposable personal income and personal consumption expenditures increase, consumer instalment loans Increase at a faster rate. An exception to this basic principle is found during the turbulent war years of 1 9 I4.2 and The exception Is explained by a number of Important factors} scarcity of 2 5 goods, large amounts or purchasing power in the form of cash, federal regulations, and the transient character of much of the population which reduced the number of appli cations for loans accepted by cash lenders. From Chart I, it Is evident that the business of making consumer Instal ment loans is not "depression born," but on the contrary as the economy expands and consumer Incomes Increase, the volume of consumer instalment loans increases at an even faster rate. The above facts are emphasized in Chart II by a comparison of personal savings and consumer Instalment loans. A mistaken assumption many persons make is that as personal savings Increase, the volume of cash loans decreases. This widespread fallacy arises from reasoning in terms of a particular family's financial problems rather than in the aggregate. From Chart II, It Is seen that consumer Instalment loans definitely follow the same pattern as personal savings. This relationship did not exist during World War II or immediately following. During the war years personal savings soared due to the scarcity of durable and semi-durable goods. Increased personal
Incomes, and the government savings bond programs. Follow ing 1 9i44-* with the increasing availability of goods, personal savings fell as rapidly as they had risen.
The Important thought to be derived from Chart II 26
CHART II CONSUMER INSTALMENT LOANS
PERSONAL SAVINSS ISM-ISM w a y (•Us - 1333 - tOO) 1400 is that not only do consumer instalment loans follow the same pattern as personal savings, but actually form a trend line for personal savings with, the exception of the above mentioned years which are indicated by the shaded area on Chart II* The results depicted on Chart II are not surprising when one considers the close relationship that is shown in Chart I between disposable personal income and consumer instalment loans. Individuals having dispos able Income may use such income for either of two purposes: they may consume it, that is, they may use it for personal consumption expenditures, as shown in Chart I; or they may save it, that Is, they may postpone use for some future time, as shown In Chart II. Personal consumption expendi tures, personal savings, and consumer instalment loans are all a function of income.
Although the total volume of personal savings has been Increasing since 19U7* as shown in Chart II, quite a different picture Is observed with respect to the hold ings of liquid assets by spending units during this period. In 19^7* a® observed In Table 2, 3 8 per cent of the spending units in our population had liquid asset holdings of less than $200, while by 1 9 5 0 the proportion of spending units In our population having liquid asset holdings of leas than $200 had increased to J4.7 per cent.
In 1951* Per cent of the spending units had liquid 28 TABLE 2
DISTRIBUTION OP SPENDING UNITS, BY SIZE OP LIQUID ASSET HOLDINGS 191^7-1951 (Per cent)
Amount of Liquid Assets Held _ 1951 1950 1 9 4 9 1948 .1947
None 2 8 31 2 9 2 7 2 4 $ 1 - $ 1 9 9 1 6 16 1 6 15 14 $200-|l4.99 ii+ 1 1 1 3 13 1 2 $500-$999 1 1 1 0 1 1 1 2 14 $1 ,0 0 0 -$l, 9 9 9 1 2 1 0 1 1 1 2 14 $2 ,ooo-$4, 9 9 9 11 13 1 2 1 2 14 $5 ,0 0 0 -5 9 , 9 9 9 5 6 5 5 5 $10,000 and over 3 1 3 4 3 All units 1 0 0 1 0 0 1 0 0 1 0 0 1 0 0 Median holdings of all units $ 3 0 0 $ 2 5 0 $ 3 0 0 $350 $470 Median holdings of those with assets $7io $ 8 1 0 $ 7 9 0 $ 8 2 0 $ 8 9 0 Source: Federal Bulletin, August, I 9I4.9, p . 899, a n d J u n e , 1951* P* 636* asset holdings of less than $200. The proportion of spend ing units having no liquid assets had grown from per cent In 1947 to 51 P«* cent In 1 9 5 0 . It should also be observed that in 1950 ar*d 1951* 5® to 60 P®i* cent of the spending units had liquid asset holdings of less than
$500. It Is thus seen that a large proportion of the population has holdings of liquid assets which are in adequate to meet a demand for a sizeable outlay of cash. 2 9
It la not difficult, therefor©, to understand the wide spread necessity for, and the tremendous growth in, con sumer Instalment loans.
The behavior of consumer instalment loans in relation to changes in our national economy and the growth of total consumer instalment loans have been shown. The relative position or growth of each of the principal lending in stitutions must now be considered. The Important sources for consumer instalment loans are Instalment loan depart ments of commercial banks, personal finance companies, credit unions, industrial banks, industrial loan companies, pawnbrokers, semi-philanthropic agencies such as remedial loan societies, friends, relatives, and illegal lenders.
The problem of determining from which institution the borrowers obtain their loans can be largely solved by observing the annual volume of loans by the principal lending institutions.
Annual data with respect to the volume of consumer
Instalment loans made by each of the principal lending institutions are presented in Table 5 and depicted in
Chart III. It is apparent that the relative positions of the principal lenders in the consumer instalment loan market have changed significantly during the I9 2 9-I9 5 1 period. The most apparent and significant change is the relative position occupied by commercial banks. Commer- TABLE 3
CONSUMER INSTALMENT LOANS
1929 - 1951
(Aoounts in ait I ions of dollar*)
Industrial Bank* Total Loans Cowtreinl Forsonnl Flnwc* •nd Industrial Outstanding IBL P»)!» Cooewios Crodit Unions .Low Comnlot All Olhtrs* I2UI »f T**r 1929 t 8,3fc i 463 t -2 * 413 t 167 :.h s I 843 1977 495 41 384 158 1,13. 664 1931 5 b 494 78 74 1 174 1,-67 617 1932 393 74 Lf\ 25 8? m 527 107’ ; i k 722 17 2 2 69 669 466 1934 4o 417 42 234 139 «?7 55.'
1975 13 455 47 288 4'-'4 1,3-4 822 1934 248 4K 175 354 612 1,929 1,09. r 0 1037 368 442 148 uM 2,4.5 1,2.5 1«38 u r 444 I'M 414 -53 2,174 1,282 193 <5 48 82" 237 455 487 2,686 1,532
194*: 1,71? 912 297 453 614 3,207 1,957 1941 1,198 935 344 458 656 -■/.n 2,143 1942 392 784 236 728 56: 2 .TC 1,431 1943 439 r- 271 27/ 441 2.36- 1,119 1944 "49 847 198 294 438 2,548 1 , 1*8 . 1945 942 054 190 ’ I7 , 533 2,947 1,422
194/. 1,397 1,231 286 441 <42 4,593 2,352 19<.'7 ■2,675 1,432 428 592 1,313 6,4:1 3,349 1948 1 io 1,534 5-7 493 1,569 7,442 4,372 1949 \2 8 2 1,73- 712 -52 1 /4 9 8,132 4,650 195: 3,8-5 1,944 894 870 1,7 1 3,25^ 5,555 1«51 4,138 2,477 ""u ’ 1 . - 8 : , . 8 ' 5, 96;.
I h ’ci: fmkm Desene Bulletin, ism, jw, i»m. ,. w*.
*1)1 atklf* IlM I lAtlufa tka** >M< 1/ aim lllA H dl l****r| •• H ll «* tb* inurM 1**11* •*#* Ur 8*f*ir *M* a*t*r*If*ti*m pvrpatat. Ta* <4t« »k t**l C«l*«*
*r* caa*via*. iAiMttn M i«tintlitA >1 («R(iraii| ««)» U i (M»»t *f *|H atk*r* Itlki Ur tack paar, tkafa tt« cM fitH 1 n t i i a t
IB* t*l«l e**a***r l*a«« •*** ip CMinrci*! *•**•» p«r«*«*l f • u t* ta * * f * § , I t h i i i m m i tm '«ll atkar' !«•«« ■**« «*«l# ***r t* tk# *ill atkar* )*#*• aatataHiia* Ikt iiat ri)«li« Tk# *#!«•* #f ca»awB*r iact*la*«>-. laaat •#*• bp t*— *rc1 *1 baah* ia p*#1t*b## aalp far ik* p*ar* 1*99; tb#r*far*, tka «■*«•! at •*** laaaa aaia *«<■■* lb# part** af a*« nt»M la«, far aa CHART III CONSUMER INSTALMENT LOANS loans Hade ty Principal Types of Lending Institutions (in n i I I i ons o f do I I a n ) 1329 - 1351 4000 3000 Comarcitl Tanta 2000 1300 1000 Ir>riuft1ri4l ^infi tfiff h ^ u s t r i i l ' P*r 3ofia I Cowoani^» loan Con»tniP« . 300 Credit 'Jmona 33 33 3T 33 43 43 47 43 T a k l a It> 3 2 cial banks ware comparatively insignificant lenders of consumer instalment loans in 1 9 2 9* accounting for less than six per cent of all such loans. Since 19M> commer cial banks have accounted for approximately i+0 per cent of all consumer Instalment loans, a fact which gives commercial banks the number one position formerly held by personal finance companies. Credit unions have also come from an obscure position to occupy the third place in volume of consumer Instalment loans. Industrial banks and industrial loan companies have shown an opposite trend during this period. Their relative Importance is more readily observed in Table 1+ and Chart IV which reveal the percentage of total volume accounted for by tyP® °f lending institution. Whereas In 1929 Industrial banks and Industrial loan companies accounted for approxi mately 3 6 per cent of consumer instalment loan volume, in 1 9 9 1 their proportion had been reduced to nine per cent of the total. During this same period, personal finance companies have also declined in relative importance. As may be observed from Chart III, all of the prin cipal lending institutions have increased their dollar volume of consumer instalment loans since 1 9 2 9 * The con sumer Instalment loan volume of commercial banks is approximately 66 times as large as It was in 1 9 2 9, that 33 T A B L E 4 PER CENT OF CONSUMER INSTAIMBNT LOANS BY TYPE OF LENDING INSTITUTION 1929 — 1951 Personal Industrial Banks Commercial Finance Credit and Industrial All Y ear Banks Companies Unions Loan Companies Others Total 1929 5.49 40.33 3.66 35.98 14-54 100.00 1930 5.84 42.92 3.63 33.63 13.98 100.00 1931 5.36 4 6 .48 3.57 31.98 12.61 100.00 1932 5.66 48.40 4.19 30.79 10.96 100.00 1933 6.43 48.13 4.93 30.20 10.31 100.00 1934 7.69 46.04 4.68 26.10 15.49 100.00 1935 9 . 6 7 33-85 4.99 21.43 30.06 100.00 1936 12.86 31.62 5.44 18.35 31.73 100.00 1937 17.99 3 2 . 3 7 7.24 20.00 22.40 100.00 1938 21.20 30.60 8.25 19.08 20.87 100.00 1939 25. 32 30.79 8.82 16.95 18.12 100.00 1940 30.88 27.69 9-02 13.76 18.65 100.00 1941 32.9 9 26.85 9.47 12.62 18.07 100.00 1942 29.33 29.0 4 8.74 12.15 20.74 100.00 1943 27. 07 33-9 0 8.52 11.82 18.69 100.00 1944 29.40 34.10 7.77 11.54 17.19 100.00 1945 31.96 32. 44 6.75 10.76 18.09 100.00 1946 3 9 . 0 4 26.80 6.23 9.60 18.33 100.00 1947 4 1 . 1 8 2 2 .37 6.69 9.25 20.51 100.00 1948 4 1 .24 20. 61 7.76 9.31 21.08 100.00 1949 40. 36 21.36 8.76 9.25 20.27 100.00 1950 a . 87 21.03 9.66 9-06 18.38 100.00 1951 4 0. 04 2 3. 24 9.03 9.01 18.68 100.00 Source: Table 3• CHART IV CONSUMER INSTALMENT LOANS. RT TYPE Of I END INS INSTITUTION 102* - I9SI (Tot* I Each Y**r * lOOt) n_L 1 n . ' r ( _ _ -i JI 1-) 1 tjy 3 5 or credit unions approximately 22 times as large, that of personal finance companies approximately five times as large, and the consumer Instalment loan volume of indus trial banks and industrial loan companies has approximately doubled. Thus far in this chapter the analysis has been de voted to consumer instalment loans as differentiated from personal Instalment loans, the latter being one type of consumer instalment loan.'*' The most important distinction between consumer Instalment loans and personal instalment loans Is that the former term includes loans made to in dividuals to purchase automobiles, whereas the latter term does not include automobile loans. Consumer instalment loans also include a small amount of other retail direct loans; however, such loans are quantitatively of minor sig nificance. When a comparison is to be made of the competi tive status of the principal lenders, the data that are invariably used are consumer instalment loan statistics. This does not make for a meaningful comparison, since personal Instalment loans actually represent the important area of competition between the three principal lenders. More than 75 P©** cent of the volume of consumer instalment loans of personal finance companies and approximately 6 0 1 See footnote II4., Chapter I, supra. 36 per cent of credit union loans consist of personal Instal ment loans, while less than ij.5 per cent of the volume of consumer Instalment loans of commercial banks consists of 2 personal Instalment loans. It Is believed advisable, therefore, to consider the competitive status of the three principal lending institutions in the personal instalment lending field. From the data regarding personal Instalment loans presented in Table 5 and depicted In Chart V, an entirely different competitive picture is seen from that shown In Chart III concerning consumer instalment loans. The data presented in Table 5 concerning the volume of personal in stalment loans are computed. Inasmuch as information is published concerning only the personal instalment loans outstanding at the end of each period.-' In the field of consumer instalment loans, it was shown that commercial banks are the most important lending institution. They came from an obscure standing to occupy their present position. In the field of personal Instalment loans, com mercial banks have increased their volume, but the relative position occupied by commercial banks and personal finance companies in the personal Instalment loan field has not 2 ------See Tables 5 and 5* ^ Footnotes at the bottom of Table 5 explain how the data are computed. TABLE 5 PERSONAL INSTALMENT LOANS 1939 - 1951 (Auounts in mi Iiions of dollars) Toll— of Len a Kxia by: Inductritl Banks CoBwrtl&l Pinonil FI nine, snd Industrial Cndlt Union**5 Low Commits* All Oth*r*c Total I U £ Banks* C a u n l u 1?39 t (.21 t 643 I 13« I 380 S 35C I 1,932 1940 57k 709 172 378 421 2,25? 1941 645 756 200 362 438 2,423 501 610 137 274 396 1,920 ir>43 426 622 117 233 321 1,719 i % 4 4?3 676 115 252 317 1,643 1945 5*. 743 115 266 377 2,083 111.6 1,000 957 166 354 556 3,033 1947 1,363 1,114 24? 414 810 3.949 l H ? 1,457 1,193 335 447 917 4,349 1949 1,4ft 1,351 413 432 935 4,612 1 W 1,645 1,513 519 439 927 5,043 1951 1,692 1,695 549 50? 1,112 5,956 Source Fe fem Reserve Bulletin, *»ni. ism. ». u-9 »*d m i* j, A Thf gOtA in th l| teat* COftCftfniftg voluPP |«rwfl|l instelM Onl I©*** *T« tO A p u te O . Ifl AS M tth u information >1 publlShe# CAACA'MAf «nl) Ihp OAl*1«Ai^§ At the Ah#ef M C A paries. The gets separating personal rnatolmonl lsens freo total CMtimr m«t»loent loins Art publishes for cs—efCiel sons*. an« ingustrtal tanks Ana ineuttriel laan companies. Far sack year, a retie ■#* gm^iIM of personal instalment loans sulstaoemg u wniM tr insialisant Jeans eetstongiag far these three institutions, Tka volume af law s ease sj (f M il sapfca. IM mgue- in o l banfcs ana iftgustrial I oat censor >•« ee* m ultiplies »y tha ratio computes far that year. ta# preeuct samp an eatlmete of personal instalment cosh leant meee an ring the year, tn th# cooaarciil banking fieig, after this estimate van a*r i^aa, seeeS on im limpings of this atugj ton cam mg purpose af loans a a presentee m Chapter * . tha constant par cant age af F.TT nas sebtrectoa fra* th« annual vol *n* estim ates since F.T7 oar cent of tha oarsoaal instalment leans MM Or eammercial banks ee* tar busm en onrooaas. b The assumption is maie by many M ithoniias m tha container eraaii fielg, that all leans m m py gar sanal finance compan iei aM area it unions art gar tonal instalment loans an# therebyas n o t me U se retail automobile oiract loans or eUer retail Street leans* in an effort la present a true picture of the competitive status af tha principal longing institutions, retail automobile airect leans, heme furnishings ana appliance leans, repair ana meserm ratten leans, real estate leans as nail as business leans aera eiclueea from the loans mM by par sen si finance caapenias ani creeit unions, laaai an the tingifigs of this stuaji as presentee m Chapter V, the percentage of total leant aeee by personal finance companies ana cremtt unions far the ebeue purpssen- auto, appliance, repair, real estate ana business-- eaa eatammea. This garcantsga «ea sabtractae free one hengreg per cent* the resulting ratio being an estimate af peretnal instalment leans ■sea by personal finance companies sag trM H umens. Tha volume of can tuner instalment loans «a«a by these\m ty p e s o f I an ear* n i m ultiplies by tha connate# ratio, the praeuct saieg an astieste er personal m steleent leans nape sun up the peer. £ *JVN It urns as bun si the leans naee s> "all other” isstitslion s far each year contamee the sane ratio of «iem okile ana other retail tired loans as the storage of the fear principal lemming in* situ tians. Far teen year, a ratio oas computes of personal isstalnant cask leans ta total consumer loan* aeee s> the four principal I sneer s. The volume of leans meSe by 'ell other* I s n e e r t m i **u'iipUea ay the ratio ceepute# for that year, the prosuct bsmg an estieate of the valiase of personal learnt mess ay *sll other* I sneer s. 38 CHART V PERSONAL INSTALMCNT LOANS Loans Hade ty Principal Typas of Landing Institutions (in aillions of dollars) 1030 - 1001 2000 ' Con«*rc[al Bank* C roC ft Uni ona I non■lrI at Bank and InOoatrlal Loan Coayanloa a i l a a a a -a. - i *- a * S 9 3 » 43 46 47 46 SI aourc*: Tabic v changed substantially since 1 9 3 9 * Personal finance companies occupied the first position In 1 9 3 9 and this remained true in 1 9 5 1 although commercial banks were leading from 19^+6 through 1 9 5 °• Commercial banks and personal finance companies continue to do the bulk of the business; in 1 9 5 1 the two were making approximately 6]+ per cent of all personal Instalment loans. Industrial banka and industrial loan companies were in close third position in the personal instalment loan field in 1 9 3 9# toy 1 9 5 0 * however, they had lost that position to credit unions. As was true in the case of consumer instalment loans all of the principal lending institutions have increased their dollar volume of personal instalment loans since 1 9 3 9 As is shown in Chart VI, the personal Instalment loan volume of commercial banks is approximately four and one- half times as large as it was in 1 9 3 9» that of credit unions approximately four times as large, that of personal finance companies approximately three times as large, and the personal instalment loan volume of Industrial banks and Industrial loan companies is approximately one and one-third as large as in 1 9 3 9 * The relative position of the principal lenders In the personal instalment loan field for each year beginning with 1939 is presented in Table 6 and Chart VII which show ko CHART VI PER CENT INCREASE IN PERSONAL INSTALMENT LOANS By Type of Lending Institution 1939 - 1951 PER CENT 5 0 0 4 0 0 3 0 0 200 1 0 0 O 1939 1951 Source: Table & 1A TABUE 6 PER CENT OF PERSONAL INSTALMENT LOANS BY TYPE OF LENDING INSTITUTION 1939 — 1951 P e r s o n a l Industrial Banks Commercial Finance Credit and Industrial Al l Y ear Banka Companies Union s Loan Companies O t h e r s To t a l 1939 21.79 3 3 . 2 8 7.14 1 9 . 6 7 1 8 . 1 2 100.00 1940 25.60 31.40 7.62 1 6 . 7 4 1 8 . 6 4 100.00 1941 26.63 31.28 8.25 1 5. 76 1 8 . 0 8 100.00 1942 26.09 31.77 7.13 1 4 . 2 8 2 0 . 7 3 100.00 1943 24.76 36.18 6 . 81 1 3. 56 1 8 . 6 7 100.00 1944 26.21 36.68 6 . 2 4 13.6 7 1 7 . 2 0 100.00 1945 27.64 35.67 5.52 12.88 1 8. 09 100.00 1946 32.97 31.55 5.48 1 1 . 6 7 1 8. 33 100.00 1947 34.52 28.21 6 . 2 8 10.46 2 0 . 5 1 100.00 1946 33.50 27.43 7.70 1 0 . 2 8 2 1. 09 100.00 1949 32.11 29.29 8 . 96 9.37 20.27 100.00 1950 32.62 30.00 1 0 . 2 9 8.71 18.38 100.00 1951 31.76 31. 82 9.22 8.53 1 8 . 6 7 100.00 Source: Table 5• CHART VII PERSONAL INSTALMENT LOANS by Type of Lending Institution 1039 - 1951 (Total Each Tear - IOC*) PER CERT 100 90 80 I 70 60 50 40 30 20 10 1939 40 41 42 43 44 45 46 47 46 49 50 51 Source: Table 5 ______Commercial Banks Personal Finance Companies Credit Unions EH Industrial Banks and Industrial Loan Companies □ A11 others the per cent of business which each of the lending Institu tions received. It is apparent that the relative positions have remained approximately constant, with the exception of commercial banks and industrial banks and loan companies. In 1939, these two types of institutions were each receiving approximately 20 per cent of the volume of personal Instal ment loans with commercial banks leading slightly; In the next twelve-year period, however, these two Institutions experienced approximately a 10 per cent change in volume of business received. Commercial banks experienced a 10 per cent gain in total volume, whereas Industrial banks and industrial loan companies sustained an 11 per cent loss in volume of personal Instalment loans. A large proportion of this shift in volume may be explained by the fact that many Industrial banks gave up their industrial banking corporate existence and became regular commercial banks.^ To the extent that industrial banks have become commercial banks, the relative growth of commercial banks in the personal instalment loan field has not been at the expense of person al finance companies. In an appraisal of the competitive status of the principal lending institutions. It is necessary to consider factors other than loan volume. One factor that deserves 5 ------See page 10, Chapter I, supra. i+4 attention is the total number of loans made by the princi pal lending institutions. If the number of loans made by the various types of lenders was known, personal finance companies would rank relatively higher than other institu tions, since their average loan size is typically much smaller than is the case of the other lenders.^ With re spect to service rendered to the community and to the greatest number of citizens, this fact speaks well for the personal finance companies. The importance of personal finance companies cannot be measured solely by dollar volume of loans• Another factor having a bearing on the competitive status of the principal lenders is the number of individual establishments which each of the three principal lenders were operating in 1951* Credit unions exceed in number of establishments any other type of consumer Instalment lend ing institutions. In 1951* there were 11,981 credit unions operating in the United States.^ Second in importance in the number of establishments specializing In the cash credit 5 As shown in Chapter III, the average size of per sonal instalment loans of commercial banks In this study was $534*17* ?or credit unions it was $4 7 4 *51* as compared to an average size loan of $244*^2 for personal finance companies. ^ Information obtained from a letter dated June 23, 1952# from the Director of Organization and Education of the Credit Union National Association, Incorporated. 1+5 needs of the consumer are personal finance companies. As of September 1, 1951* there were 6,758 personal finance companies operating under the regulatory laws and licenses of the several states of the United States.*7 In third place in number of establishments are commercial banks. Of the lij., 555 commercial banks in the United States, there are approximately 10,000 to 12,000 commercial banks active In some phase of consumer credit; however, there are only approximately 5*000 to 1+.,000 commercial banks In the United Q States which have separate instalment loan departments.0 In considering the competitive status of the princi pal lending institutions It should be noted that in certain respects personal finance companies have been severely handicapped In the competitive struggle. The maximum size of loan permitted by the small loan laws of most states is still $500. That this does not meet the needs of a great many borrowers has been clearly demonstrated in those states which permit personal finance companies to make larger loans. Another factor which places personal finance companies at a disadvantage is that there are no free depositor funds at the disposal of personal finance 7 Information obtained from a letter dated June 20, 1952, from the Executive Vice-President of the National Consumer Finance Association. Q Information obtained from a letter dated June 2J^, I952, from the Deputy Manager of the Committee on Consumer Credit of the American Bankers Association. k6 companies. This factor is partially offset by the higher interest rate which personal finance companies may charge; the interest rate, however, is very rigid and has not been raised during the inflationary years to meet the increased costs of loan office operation. Another handicap under which personal finance companies operate is that advance repayment of loans must be accepted when offered with no discount or unearned interest money to be retained and with no minimum charge to cover the cost of handling the short term loan. Before concluding this chapter concerning the com petitive status of the principal lending institutions it must be emphasized that all lending institutions and borrowers have realized distinct benefits from the competi tive situation. The continued steady increase in loan volume by all the principal lending institutions furnishes proof that lenders have so benefited. The borrowers have also benefited, since competition among the principal types of lending institutions as well as intra-institu- tional competition has forced lenders of every kind to render more complete and better instalment loan service. The entrance of commercial banks into the consumer Instalment loan market and the expansion of the credit union movement have brought two distinct advantages to personal finance companies. First, these actions have k7 largely overcome the prejudice the public has long held against those who lend money to the consumer, thereby gaining respect for the consumer instalment lender. The consumer instalment loan has come to be recognized as an economic necessity and a dignified means of budgeting anticipated income to meet current problems. Another gain personal finance companies have received fi*om the in creased competition from commercial banks has been that funds are more readily available to the personal finance companies at lower rates. This has come about not only from the sale of personal finance company securities,but also from the fact that larger amounts of credit, from more sources, at lower interest rates have become available to personal finance companies. The commercial banks, despite their early hesitancy to undertake consumer instalment lending, have learned from experience in a direct way, and in an indirect manner through loans to personal finance companies, that the American wage-earner or the typical personal borrower is a good credit risk. CHAPTER III CONSUMER INSTALMENT LOAN CHARACTERISTICS A clear understanding of the nature of the market for consumer Instalment loans demands a detailed examination of the characteristics of the loans and of the economic, social, vocational, financial, and personal characteristics of the borrowers. This chapter will be devoted to an ex amination of loan characteristics; the characteristics of the recipients of consumer Instalment loans will be the subject of Chapter IV# The loan characteristics to be analysed in this chapter are size, security, and length of loan contract# Size of Loans Within the range permitted by the maximum loan limit ations imposed by the laws of the various states there occurs considerable variation In the size of the loans granted by consumer Instalment lenders in various commun ities, from year to year, to different borrowers. The most important factors controlling the size of the loan are: general business conditions, maximum loan size limit ations, the borrower'a ability to repay the loan, extent of industrialization, general prevailing wage and cost of living levels in different localities, competitive condi tions, policy of the Individual lenders, and the rate of kB 4 9 interest permitted In the state. Further consideration will be given to this last factor In a subsequent chapter; however, it should be understood that by keeping a fairly high maximum rate for small balances, consumer Instalment lenders are encouraged to serve the most necessitous bor rowers and that this policy is the best deterrent of il legal lending. For many years the Uniform Small Loan Law has limit ed to a maximum of $300 the amount which a personal finance company may lend to each borrower. Today, the small loan laws of thirteen states^ provide for larger loans than the $300 maximum loan established by the Uniform Small Loan Law of 1 9 1 6 . In all of these thirteen states, however, the maximum rate of charge^ on larger loan balances are not 1------The states of Connecticut, Illinois, Indiana, Michigan, New Jersey, New Mexico, New York, and Washington have raised their maximum loan limit for personal finance company loans to $500; Nebraska and Qnlo have a $1,000 limit; Nevada has a $1,300 limit; and there is no legal maximum loan limit In California and Missouri. 2 Under the Uniform Small Loan Act there is a fixed maximum rate of charge per* month, expressed as a per centum, that licensee may charge on the unpaid principal balance of small loans. No additional fees of any type are permitted. Much of the public misunderstanding of the legal small loan rate is due to the per cent per month method of stating the total, all inclusive charges for small loans. Nevertheless, a flat maximum rate is the most clearly intelligible to borrowers, most readily calculable, and most easily enforced by supervisory auth ority. This maximum rate should not be considered as a rate of interest since It is actually a charge, expressed as a rate of charge, made for more complete investigation, servicing and collection of small loans. 50 of a small loan type. In nine of these thirteen states the maximum charge permitted on loan balances of more than $300 is the legal contract rate established in the respective states. In one state the maximum charge is of a small loan type on loan balances of $lj.00 or less, and in three states on loan balances of $ 3 0 0 or less. It is significant that the maximum rate of charge on loans of more than $ 3 0 0 is not of a small loan type in any state. A map of the United States showing the effective ness of the state laws regulating the operation of personal finance companies is presented in Appendix B. A summary of these laws showing the Interest rates and loan size permitted in each state is presented in Appendix A. Commercial banks which grant consumer instalment loans in many states do so under the general banking laws, which do not specifically authorize the instalment pay ment plan; however, loan maxlmums are established for con sumer instalment loans by the statutes of many states. Of the states which have enacted legislation permitting commercial banks to make consumer Instalment loans, nine teen place a maximum limit on the amount that may be loan ed to a single borrower on an instalment basisFour 3 The following nineteen states place a maximum limit, as specified, on consumer Instalment loans made by commercial banks: 51 states have a maximum or $1,000, and only three states have a maximum of less than $1,000. The maximum loan that can be made by credit unions without security or without endorsement is ordinarily $100, Secured loans by credit unions may exceed this limit under conditions specified by the state credit union law; how ever, many states do not place a limitation on the size of the loan extended on a secured basis. A summary of credit union laws showing the unsecured loan limit and the secured loan limit by states is presented in Appendix L. The federal law covering the operation of credit unions permits loans Arizona $1000 Arkansas 2 5 0 0 Delaware 500* or 10% of capital and surplus, if paid-in capital exceeds $10,000 Florida 2 5 0 0 Iowa 2 5 0 0 Kentucky 5 0 0 0 Maryland 1 5 0 0 Mlchigan 3* of capital and surplus Minnesota 1 5 0 0 Mississippi 500 Missouri 800 Nebraska 1000 New Jersey 2 5 0 0 New York 5500 if office of bank where loan made is located in city of over 1,000,000 population 2 5 0 0 if such office is located in city of 3 0 0 , 0 0 0 to 1,000,000 population, or in city of not less than li+0,000 and immediately adjacent to city having over 1,000,000 population, 1 5 0 0 if such office is located in any other place North Carolina 1 5 0 0 Pennsylvania 5500 South Carolina 1000 Wisconsin 1000 Wyoming 1000 52 to be made on an unsecured basis up to ^ 4 . 0 0 and the maxi mum loan with security Is set at ten per cent of the un impaired capital. Distribution of the number and amount of loans made by personal finance companies In twenty-five states Is pre sented In Table 7* This information was derived from annual reports of state banking departments for the year 1950 and Includes all loans (6,602,339) by licensed personal finance companies operating in these twenty-five states• The size of loans In these states varies sufflcient- ly to justify a brief examination of the causes. As has been previously stated, the legal celling on the rate of charge is an Important factor affecting the predominant size of loans in any state. As would be expected, a greater proportion of smaller loans is found in those states which permit a charge of 3 or 3 1/2 per cent per month on loan balances of $100 or less than Is found in those states allowing only 2 or 2 l/2 per cent per month. Examples of states which permit 3 or 3 1/2 per cent per month on these smaller loans are Colorado, Idaho, Washing ton, and West Virginia. In those states, as well as in most of the twenty-five states which permit a charge of 3 or 3 1/2 per cent per month on smaller loans, such loans typically account for 3 0 to ij.0 per cent of the TABLE 7 5 3 DIBTRISUTIOB OF BUNBCM Of UMMO MH> JMXWTt Or LOAM IB TBOMMBt Or 004.LAM HAM or FfBSOBAl FIBABCC COMM ICS IB TM BTr-fl*I STATtS * IBBO • r} t . 1 I i . : * i * . . i f > - 1 i 5 . ' 3 1 * ■' • : 1 ” > . 1 o '- a r, o 1 0 t o t o t o t o 0 \ s r • r j » r c * 1 ' r 2 f -i * t -*'j J 1 . i r * t i : .-*• f •• - J, T ’ %!-» - - ' ■■ B * ' I i : : , ? ' ^ B 2 2 , - ^ i ? * . 2 , 1 2 - •s! 1 'o r-l* l» -a j r # r . 2 : * , ' f > : s'v*- f ; i t T p * * 2 ! ’ t 1 v : 2 '* , >2 t l*'20rt'*t t 0 ■>1'’ *'■,*! r r > i . p • * r ■» i “ 7 « - " t 7 '’ o l o r n i o ’-‘►O'J? 1 * ' • A * x ’. \ V “ u - 1 < r 3 % . ? ' 3 2 p ~ ? p T ^ , ' 2 / ? '■ * ” 1 ^ , 2 i . • » 1 2 , * W •*.. -T " * ’ I* l* 0 '. ’ ■ • \ ji* * : i . ’ - r ? ,* '• * * 1 ■? r 2 3 ” 1 T 5 J , . 2 1 V , ' p ^ . • ; ? ! 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F«r jm%r « b # I b | h K M k i N , IBBB. ■M rsAt1* aaaaal r«Mr| cw kliti i«a* trwm |M.QI to JiM lata a al««ta «raaaf IIBavlaa MBIaaa ttt to «M laaa*. Far aalfaralty, IMm lirftr cla**m«atl*a« vara aaoarataB Bf w |i* M la'M Btsfic «f laaa sI r** 4r*» at 1 tha aBava stalas ifw r tfca BaBraafca, Baa M i«*ira. arf BBla. f a r t — r aaai*« Jaaam , tM I. Baa BaapaBI ra>* m m > raaart «a*M**» >**»* fraa HBB.BI to M l lato a bi*«Ib «raaa. Far *• ««»*+» aaaaal r***Ms M I^a m laaa# »r« «l*P-Pi to MB* lato a alnfla )n u Bar aaltoroltp, «Ba lar^r alaaalfIm U p wa tsftn lM By aaplr4*« caaBlaaB paraaata^* al laaa «laaa fraa all tBa aBaaa sU to* atBar tBaa BaBraata, aaa aaaa*****, a m BBla. 5k total number of loans made by personal finance companies* Examples of the states which permit 2 or 2 l/2 per cent per month on loan balances of $100 or less are New Hamp shire, New York, Massachusetts, and Vermont* In these latter states, such loans typically account for approxi mately 1 5 psx* cent of the number of loans made by personal finance companies* It Is also Interesting to observe the effect of the maximum legal rate on the number of smaller loans granted In the state of New Mexico* New Mexico Is the only state permitting a monthly charge of 5 per cent on loans of $ 5 0 or less* As shown In Table 7 * loans of $ 3 0 or less account for 53 Per cont loans made by personal finance companies In New Mexico, and It should be further noted that this proportion is more than double that of any other state for loans of $ 5 0 or less* Loans of $100 or less account for 7° P°r cent of all loans made by personal finance companies In New Mexico* It may also be seen from Table 7 that In every state, with one exception, where the loan maximum was $300, loans of $200*01 to $ 3 0 0 were numerically and quantatlvely in the majority* In those states which per mit personal finance companies to make larger loans, loans of $200*01 to $300 accounted for only approximately 20 per cent of all loans made by personal finance companies* 55 Another Important factor affecting the predominant size of loans In any state is the extent of industrializa tion. Agriculture states, where borrower Incomes are gen erally lower than in industrial states, have a larger pro portion of loans for $100 and less, unless offset by other factors such as the rate of charge persiltted. In agricul tural states such as Minnesota, Idaho, and Indiana, loans of $100 or less account for approximately 3 0 per cent of all loans granted, while in industrial states such as Ohio and Michigan loans of $100 or leas accounted for less than Id per cent of all loans. This was true in Ohio and Michigan in spite of the 3 P®** cent per month charge per mitted in these states on these smaller loans. When a state is not extensively industrialized and a higher maxi mum legal rate of charge is permitted on the smaller loans, such states have an even larger proportion of loans of $100 or less. This fact is illustrated in Colorado where loans of $100 or less accounted for ij.3 per cent of all loans granted by personal finance companies during 1 9 3 0 , It is not to be Inferred that in agricultural states there is a large proportion of farmer-borrowers• Instead the comparison of per capita personal Income and the size of loans is the significant relationship. In those states which are extensively industrialized and where personal incomes are relatively higher, there is a greater 56 need Tor consumer instalment loans or larger size. Another factor accounting for the predominance of smaller loans in any state is the proportion of loans which is secured by wage assignments. Illinois is the only state in which personal finance companies still make extensive use of this type of security. In 1950. >0 per cent of all loans granted by personal finance companies in Illinois were secured by wage assignments. Since this type of loan is usually much smaller than loans otherwise secured. Illinois shows a high proportion of loans of $ 5 0 or less* It is equally Important to observe the proportion of larger loans which are granted by personal finance companies in those states which have Increased their loan limit beyond the $300 maximum.^ In all such states, as seen in Table 7» loans of $300.01 to $300 were quan- tatlvely the most important and. except in Nebraska, were numerically predominant. Loans of $300.01 to $300 typically account for more than 2 0 per cent of all loans made by personal finance companies in such states. In New Jersey and New York where the loan maximum Is $300. loans of $3 0 0 . 0 1 to $ 3 0 0 accounted for more than I4.0 per It has been stated earlier In this chapter. In those states which have Increased their loan limit be yond the $ 3 0 0 maximum, the rate of Interest permitted on loan balances of more than $ 3 0 0 is usually the legal con tract rate established In the respective states. 57 cent of ell loans in these states. In the two states which have increased their loan limit to $1 0 0 0 , loans of $5 0 0 ,0 1 to $ 1 0 0 0 are seen to account for between 1 5 and 2 0 per cent of all loans granted in these states during 1 9 5 0 » The need for raising the loan ceiling for personal finance companies has received much attention by the legis latures in many of the states which have the Uniform Small Loan Law. This definite need, particularly In industrial ized states, is well Illustrated by the statistics show ing the predominance of larger loans in those states which have Increased their loan maximum. Data for 195^* from those states which have published their annual reports, show an even greater proportion of larger loans being granted than was true in 1 9 5 °* emphasizing the increasing need for larger consumer instalment loans. The average size of loans granted during 1950 by personal finance companies in the 2 5 states represented was $2i*4«ip2This figure represents a considerable in crease in the average size of loans since the early days of operation by personal finance companies, when, inci dentally, the maximum loan permitted in all states which had small loan legislation was $500. Only fifteen years ago, the average size of loan in thirteen representative ^ Computed from Table 7» 58 states was #155*^ Brief examination of basic economic changes that have occurred since the late 1 9 5 0 *a emphasize the necessity of increasing the loan maximum. The cost of living for moderate Income families, as indicated by the Consumer Price Index of the Bureau of Labor Statistics, had risen more than 'fO per cent by 1950*^ The purchasing power of the dollar as measured by the Consumer Price Index had fallen by 1 9 5 0 to 5 8 * 2 from the 100.6 monthly average of o 1959* By 195° there was approximately only $1?5 purchas ing power in a $ 5 0 0 loan. Another important factor that emphasizes the need for larger loans is the pressure for higher standards of living among wage earners as evidenced by the type of products in common use today compared with the earlier period. Products such as radios, refrigerators, washing machines, television sets, and many other items of high price are no longer considered as luxuries. Consumers have come to require such items as a part of what they regard as a satisfactory level of living. When considering the advisability of raising the ------5 ------Ralph A. Young, Personal Finance Companies and Their Credit Practices. (New 1fork; National bureau of ' Economic Research; 1 ^ 0 ) p. 4 7 . The index rose from 99*^ in 1929 to 171*9 by 1950. Statistical Supplement To The Survey of Current Business.1951* P* 25* 5 Ibid.. p. 2 9 . 59 loan maximum, the size of the borrower's income is or particular importance since this represents his ability to repay the loan* Disposable personal Incomes have in cress ed from 7 0 * 2 billions of dollars in 1 9 5 9 to 222*6 billions of dollars in 1951*^ This represents more than a threefold increase* Compensation of employees had in creased even more; the 1 9 5 0 wages and salaries amounting 10 to 520 per cent of the 1939 payments* It would certain ly seem that the borrowers have the Incomes necessary to repay the larger loans• These comparisons suggest that a $500 loan limit does not have the same meaning as in former years* The apparent answer to the problem would be to have the con sumers who needed more than $ 3 0 0 go to the commercial banks. However, this is not the solution* As will be shown, many borrowers of personal finance companies, whether they need more or less than $3 0 0 , are unable to meet the requirements of commercial banks* If the family needs more than the $ 5 0 0 maximum and borrows from two personal finance companies, the cost to the borrower is much greater than if it were possible to borrow the en tire amount from a single source* This is because the ^ Table1* 10 Statistical Supplement to the Survey of Current Business, 19^1, p. 6* 60 rates permitted on loans or more than $ 3 0 0 are not of a small loan type* but Instead are the legal contract inter est rates In most states. The $300 maximum can hardly be considered as a "protection"to the borrower. Loan limits should not be regarded as rigidly fixed* but should be considered in relation to the economic conditions of the time • 11 A comparison of chain and independent personal finance companies operating in the state of Ohio during 1930 on the basis of size of loan is presented in Table 8 and Chart VIII. The reason for such a comparison is because the charge is sometimes made that chain organiza tions in this field only "skim the cream" of the loan market and do not make the smaller size loans. Not only has this statement been made by certain social workers but it was also expressed by several managers of independent personal finance companies which the writer contacted. It is observed that there is no striking difference between chain and Independent companies In regard to the amount of money which they lend to different borrowers. With both types of organizations* the predominant size of loans was between $1 3 0 .0 1 to $3 0 0 * this size classi fication comprising approximately per cent of all loans. n ------Chain personal finance companies are defined as those companies which owned and operated two or more branch es during the year. TABLE 8 CLASSIFICATION OF PERSONAL FINANCE COMPANIES LOANS ON THE BASIS OF THE SIZE OF THE LOAN CHAIN AND INDEPENDENT COMPANIES COMPARED STATE OF OHIO — 1950 Amount of Loans Number of Borrowers (in Thousands of Independent Independent Chain Companies Companies Chain Companies Companies Size of Loan Number Per Cent Number Per Cent Amount Per Cent Amount Per Cent 50.00 or Less 35,836 5.17 9,161 9.62 ♦ 1,499 .65 $ 349 1.24 50.01 to * 100 88,117 12.71 14.760 15.49 7,506 3.27 1,276 4.55 100.01 to 150 79,927 11.53 11,070 11.62 10,520 4.58 1,467 5.23 150.01 to 300 199,032 28.71 26,164 27.47 45,349 19.75 6,423 22.90 300.01 to 500 148,176 21.38 19,616 20.59 59,334 25.83 8,067 28.76 500.01 to 750 87,118 12.57 8,418 8.84 55,280 24.07 4,799 17.11 750.01 to 1,000 .. -1*22 6.069 6.37 50.190 21.85 - W 7 0 20.21 Total 693,177 100.00 95,258 100.00 229,678 100.00 28,051 100.00 Source: This information was obtained from annual reports submitted to the Division of Securities, State of Ohio, by all licensed personal finance companies operating in the State of Ohio during 1950. o\ H 62 C H A R T VIII CLASS! FI CAT t OK OF PERSONAL FINANCE COMPANY LOANS ON THE BASIS OF THE SIZE OF THE LOAN CHAIN AND INDEPENDENT COMPANIES COMPARED Stata of Ohio— IO0O PEI CE*T OF LOAKf 30 63 The only noticeable difference between the two types of organizations was for loans of $100 or less and for loans of more than $500* One-fourth of all loans made by Inde pendent companies were for $100 or less, while less than one-fifth of the loans made by ohaln companies were In this class. A reversal of this situation Is observed In the larger loan sizes. Slightly more than one-fifth of all loans made by chain companies were for more than $3 0 0 , while only 1 3 per cent of the loans made by Independent companies were for these larger amounts. The major explana tion of the Inability of Independent companies to make loans for more than $ 3 0 0 Is due to their lack of loan funds. Some of the Independent personal finance companies are forced to pay Interest rates of more than 8 per cent per annum for their loan funds, which Is in excess of the rate they charge their borrowers for loans over $ 3 0 0 under the Ohio Small Loan Law. A more pronounced tendency for fewer loans of $100 or less and more loans of over $ 3 0 0 was ob served In the operation of the four chain companies which operated more than thirty offices in the state of Ohio dur ing 1950. These four personal finance companies made 1J..73 per cent fewer loans of $100 or less and approximately two per cent more loans of over $ 3 0 0 than were made by the other chain companies operating In Ohio during 1930. Unlike personal finance companies which are limited 6k to cash advances of # 3 0 0 In most states* the instalront loan departments of commercial banks make the majority of their loans for substantially larger amounts* Table 9 and Chart IX shov the size distribution of consumer instal ment loans by the principal lending institutions* From the seventeen commercial banks from which in formation was obtained concerning size of loan* less than three per cent of the loans made by these institutions were for amounts of # 1 0 0 or less* whereas more than 2 0 per cent of the loans made by personal finance were for these smaller amounts. Loans of more than #300 account for more than 3 0 per cent of the activity of commercial banks* while these larger loans comprise less than four per cent of the loans made by all personal finance companies* The predominant size of loan for both commercial banks and personal finance companies was the size classification #200*01 to #300* The average size of personal instalment loan of commercial banks was #5 3 i4-*17 *a compared to an average size of loan of #2 1 4 4 *1^2 for personal finance companies* A larger proportion of loans of # 1 0 0 or less was made by credit unions than either of the other principal lenders• Such loans account for more than 30 per cent of the loans made by credit unions. Another interesting fact concerning the size of loans is that only 36 per TABLE 9 CLASSIFICATION OF LOANS ON THE BASIS OF THE SIZE OF THE LOAN BT THE PRINCIPAL TYPES OF OCNSUMJR INSTALMENT IENDING INSTITUTIONS 1950 — 1951 Personal Finance Cannanies4 Ccanercial Banks** Credit Unions0 Number of Nwber of Number of Sise of Loan Loans Per Cent Loans Per Cent Loans Per Cent A 50*00 or Less 502,674 7.61 213 .13 1,910 11.22 50.01 to $ 100 930,017 14.09 4,434 2.65 3,541 20.80 100.01 to 150 886,366 13.42 20,353 12.15 1,719 10.09 150.01 to 200 811,940 12.30 18,090 10.80 1,692 9.94 200.01 to 300 1,953,981 29.59 37,618 22.46 2,013 11.82 300.01 to 500 1,256,880 19.04 36,110 21.56 2,102 14.22 500.01 to 750 153,614 2.33 23,706 14.16 1,154 6.78 750.01 to 1,000 89,824 1.36 9,817 5.86 1,024 6.01 Over $ 1,000 17.043 .26 17, yp 1 0 . 9 -1*22 ?.12 Total 6,602,339 100.00 167,471 100.00 17,028 100.00 a Table 7. b Represented by seventeen cooanercial banks. c Represented by five credit unions. 66 CHART IX CLASSIFICATION OF LOANS ON THE BASIS OF THE SIZE OF THE LOAN BY THE PRINCIPAL TYPES OF CONSUMER INS1ALMENT LENDING INSTITUTIONS I900 - 1901 PE» C EH T Personal Finance Comoan i es Commercial Sank a 30 Credit Un ions 67 cent or credit union loans were from $1 5 0 .0 1 to $5 0 0 , where as more than 60 per cent of personal finance company loans and 53 P®r cent of commercial bank loans were of such size. Twenty-two per cent of credit union loans were for amounts in excess of $ 5 0 0 as compared to 50 per cent for commercial banks, and 4 per cent for personal finance companies. The average size of loan made by the seven credit unions was $14.714.. 5 1 * which amount was approximately $60 less than the average personal Instalment loan made by com mercial banks, but approximately double the average size of loan made by personal finance companies. In the state of Ohio during 1950* 277 credit unions made III4., 2 5 8 loans amounting to $3 7 *^4-1 9 *3 0 0 , the average size loan being 12 $327*50* This average size of loan was $ 1 5 0 less than the average size of loan made by the seven credit unions included in this study and is explained by the fact that the credit union of average size in Ohio is much smaller than any of the seven credit unions examined. Smaller credit unions generally grant smaller loans since they are handicapped by lack of loan funds. Security for Loans Consumer instalment loans made by personal finance companies and credit unions and personal instalment loans ------T 2 ------Analysis And Recapitulation of Reports Filed By Ohio Chartered Credit Unions For frhe">fear‘"Sndlng December 31* 1^56; £>1 vision pi* Securities, State of 0hio7 p. 1. 68 mad# by commercial banks are essentially character loans* Character and the ability to pay are the determining fac tors In the granting of cash credit to consumers. Chattel mortgages on household goods are quite commonly taken by personal finance companies but foreclosures are rare as will be shown In a subsequent chapter* The value of this security has little weight In the final determination of the loan* Most of the states that have the Uniform Small Loan Law require personal finance companies to submit as part of their annual report a separate classification of loans by type of security* This Information from 2.1± states is presented In Table 10 and Chart X for the year 1950* most of those states* about 60 per cent of the loans made by personal finance companies were secured by chattel mort gages* Chattel mortgages on household goods represented the security in approximately i^O per cent of the loans in most states. Use of unsecured notes is widespread* amount ing to more than ^5 Per cent of all personal finance company loans extended in those states. Approximately 1 9 P®r cent of loans made by personal finance companies are secured by co-maker notes* wage assignments* and other security* In five states the unsecured note ac counts for more than 35 Por cent of all loans made by personal finance companies* Those five states are •m * * r j N i ■!■** «H * *J « ■ * ! pva ' t U H M w n •< H t * w ( ] u iwml|lf» riw rt itfdlMi inMfl m% «|« #*•* «M| «* f»t *11 M * |« M tl M ** * 5**49 H'lM W|i n# u«*ui* inniM >« MikiiMt a«i■H«M UlXH |M> »*« W M H •>*«• l » *• namt h m m I : it i ur'ti t a*'*!; t «4£*UC 1 «o*«l t 1*6*69* t r^'iu t I'JhOU*' l‘W* tlA* - iW 6tS* ZJt «»*4tV‘X ut'tct 6*4*9** mrrtu'z m ' . t t i t o 1 cv$ r W T T ’f ' W t (“ UPttl lUTtKV UfCUftJ&Jjt t *‘*51 1*1 »•' *C6*9 UO"n 5W *4 „V9.*6* 6t»**9 59t*Xt t 2 i 947*1 1 W X 1 969 1 l^*£ * £■**0* 1 yjtwwiY £5.*£kl ” 4-*: -97 4ti*6 (££•#£ tt'*t HC**t 6*0*001 J* 1*h.‘. 91‘a i i« » *t; t ■XC 1 cot,*' t ♦99 I ao*£ * 666*61 1 r,jn «ti Ail WO K JO M U M , *tiiVit «nu -Ai*Mi HI a m « « 9 nwraii i n o n M a« m*m tni'KM to — m m m 111 « m n to umwot «w cmoi m mnmm io Hoiimxuti* oi navi 69 70 CHART X CLASSIFICATION OF LOANS BY TYPE OF SECURITY By Personal Finance Companies in Twenty-four States 1090 pta o c n t OP LOANS Sourc*; Tab)* 10 71 Connecticut, Massachusetts, Minnesota, Rhode Island, and Virginia. In Connecticut, the unsecured note represents 9 5 P®** cent of all loans made by personal finance companies. This is partially explained by the fact that the Connecti- IX cut Banking Law * allows only unsecured and co-maker notes to be accepted by personal finance companies; nevertheless, it is encouraging to see that only five per cent of the loans were secured by co-makers in Connecticut. Use of the endorsed and the co-maker note, bearing the signature of one or more persons in addition to that of the borrower, ranged in different states from 1 . 5 3 per cent in Idaho, to 10.15 per cent in Virginia. The endorsed and co-maker notes typically account for approximately I4. per cent of loans by personal finance companies. Loans on wage assignments are in most states non existent or are an insignificant proportion of the total 1 3 ------The following is quoted from the Connecticut Laws Relating to Small Loans, (Hartford, Connecticut: feank Commission ot Connecticut; October 1, 191+9) P* o# "No licensee shall take any confession of judgment or any power of attorney, nor shall he take any note, promise to pay or security that shall not state the actual amount of the loan, the time for which it is made and the rate of interest charged, nor any instrument in which blanks are left to be filled after execution. No licensee shall take a mortgage, lien, assignment or pledge of chattels or real or personal property of any kind or an assign ment of wages as security for any loan made under this chapter.* 72 personal finance company loans; however. In three states a large proportion of loans are so secured. In Illinois the vage assignment accounts for 2 9 .8 I4. per cent of loans. In California 21, 814. per cent, and in Oregon lif*57 per cent. The major explanation of the high proportion of wage as signments In these states is due to the operation of one personal finance company which still requires a wage assignment for a large percentage of its loans. This company's home office is in Illinois and It also has a large number of offices In California and Oregon. Wage assignments have so often made trouble for employers that It has become a common practice to dismiss employees when they are reported to have borrowed in this manner. Since this gives the lender an opportunity to exploit the bor rower's fear of losing his Job, this form of security has been made illegal In many states. Since 19lj_0, the two largest personal finance companies have discontinued the practice of taking wage assignments. In Table 11 a comparison Is made of chain and Inde pendent personal finance companies operating in the state of Ohio during 1950 by type of security accepted for loans. It is observed that there is little difference between chain and independent companies with respect to security for loans. Although chattel mortgages on household goods 73 TABLE 11 CLASSIFICATION OF PERSONAL FINANCE COMPANIES LOANS BY TYPE OF SECURITY, CHAIN AND INDEPENDENT COMPANIES COMPARED STATS OF OHIO — 1950 Independent Chain Companies Comnanies Number of Number of Type of Security Loans Per Cent Loans Per Cent Chattel Mortgages on Household Goods 268,220 38.69 28,316 29.73 Chattel Mortgages on Motor Vehicles 118,656 17.12 24,973 26.22 Chattel Mortgages on both of the above Items 95,062 13.71 10,085 10.59 Chattel Mortgages on Other Chattels 30,577 4.41 3,081 3.23 Co-maker, Endorsed or Guaranteed 31,991 4.62 6,546 6.87 Unsecured Signature Loans 144,793 20.89 21,120 22.17 Other Security £ .56 lf,l? Total 693,177 100.00 95,258 100.00 Source: This information Mas obtained from annual reports submitted to the Division of Securities, State of Ohio, by all licensed personal finance companies operating in the State of Ohio during 1950. 7k were taken as security by chain companies Tor approximately nine per cent more loans than was true or independent companies, the independent companies took chattels on auto mobiles for approximately nine per cent more loans than did the chain companies. Independent companies made loans on the basis of unsecured notes in a slightly higher pro portion than did the chain companies. In order that a comparison may be made ot the type or security accepted by the principal consumer lending institution. Table 12 and Chart XI are presented. It is readily seen that there are numerous dirrerences among the three principal lenders with respect to type or secur ity. Chattel mortgages on household goods were the pre dominant type or security accepted by personal rinance companies; chattel mortgages on automobiles and wage assignments were in prererence by credit unions; whereas unsecured notes accounted Tor 65 per cent or the personal instalment loans extended by commercial banks. A sur prising ract was that credit unions insisted upon having wage assignments Tor almost one loan out or every three. Two or the credit unions studied required a wage assign ment Tor every loan which they made, usually in addition to other security. In the commercial banking rield, only one bank made use or wage assignments, and then TABLE 12 CLASSIFICATION OF LOANS BT TIPS OF SECURITY BY THE PRINCIPAL TYPES OF CONSUMER INSTALMHfT LENDING INSTITUTIONS 1950 — 1951 Personal Finance Conwrcial Companiesa Banka Credit Unions0 Number of Number of Number of Type of Security Loans Per Cent Loans Per Cent Loans Per Cent Chattel Mortgages: Household Goods 2,798,408 43.20 7,921 5.02 3,463 10.63 Automobiles 954,529 14.75 19,231 12.20 11,299 34.70 Other Goods 309,927 4.79 1,632 1.03 133 .41 Unsecured Notes 1,659,826 25.62 102,915 65.27 866 2.66 Endorsed and/or Co-maker Notes 270,519 4.18 20,740 13.15 5,366 16.48 Vage Assignments 453,074 6.99 14 .01 9,628 29.57 Real Estate 484 .01 1,669 1.06 1,098 3.37 Savings Accounts 675 .43 655 2.01 Other Considerations .^6 2.88j> 1.8? •17 Total 6,477,439 100.00 157,682 100.00 32,564 100.00 a Table 14. b Represented by seventeen cosmercial banks 0 Represented by five credit unions. 76 CHART XI CLASSIFICATION OF LOANS bY uP E OF SECURITY bV THE PRINCIPAL TYPES OF CONSUMER INSTALMENT LENDING INSTITUTIONS I960 - 1951 (in per cent of loans Made) PERSONAL FINANCE C04CRCIAL CREDIT TYPE OF SECURITY COMPANIES SANKS UNIONS Real Estate, Saving* I.G7 r b.bb Account* A Other Tjtmi Maqe A** I gn*ents EndorMd or Co-Hakar Kota* 29. 67 Uni Chattel Mortgages IS.7# Autoatobi i a Household A Other Good* * 7 .9 9 Source: Table ft. 77 only In rare cases. Personal finance companies used the wage assignment for seven per cent of their loans. More than 2 5 per cent of personal finance company loans were unsecured; 6 5 par cent of the personal loans of commercial banks were unsecured; while less than three per cent of credit union loans were unsecured. There were also vast differences observed among the commercial banks regarding type of security for loans. To illustrate, one of the banks made loans on the basis of unsecured notes for more than 9 0 Per cent of its personal Instalment loans while In another bank only ten out of 1*20 loans analyzed were made on an unsecured basis. To further show the stringent lean policy followed by the latter bank, the following Is quoted from a letter receiv ed from the president of this bank: We might add that to qualify for a personal loan, we require five years steady employ ment at the same Job, real estate equity, good credit, and then limit the loan to not more than one month's lncome.^M- Aa another example of the different policy among commercial banks with respect to security for loans, chattel mortgages on automobiles was taken as security for more than 75 per cent of all personal loans in one ^ Quoted from a letter dated January 2 5 , 1952 » received from the president of one of the commercial banks included in this study. 78 bank while in another bank this type or security was used In less than four per cent of Its loans. With all lend ing institutions, automobiles provided the security for many loans for which the purpose or purposes of the bor rowed money was other than the purchase of a car. With respect to the security pledged for consumer Instalment loans, from Table 13 It is Interesting to ob serve the average size of loan made by personal finance companies and commercial banks for each security classifi cation. It was shown earlier in this chapter that the average size of personal Instalment loan by commercial banks was $5 3 4 * 1 7 and the average size of loan made by personal finance companies was only $ 2 4 4 , 4 2 . This same ratio does not exist for average size of loans for each security classification although, in general, it follows the same pattern. It may be surprising to realize that the average size of loan made on a completely unsecured basis by commercial banks was $598.13 *nd by personal finance companies, $ 2 0 2 . 6 3 * In the commercial banking field, it should be remembered that these unsecured notes accounted for 6 5 per cent of their personal instalment loans. This is certainly further evidence that the American wage-earn er is a good credit risk. 79 TABLE 1? AVERAGE SIZE OF LOAN BY TYPE OF SECURITY BY THE TWO PRINCIPAL TYPES OF CONSUMER INSTALMENT LENDING INSTITUTIONS 1951 Average Size Loan Personal Finance Type of Security Companies* Commercial Bank»b Chattel Mortgages: Household Goods $ 320.39 483.01 Automobiles 359.98 829.48 Other Chattels 363.78 529.24 Unsecured Notes 202.63 396.13 Endorsed and/or Co—maker Notes 234.59 537.90 Wage Assignments 148.99 579.40 Savings Accounts 2,190.07 Other Security 289.08 707.15 a Representing 3,321,841 loans made by six personal finance companies during 1951. ^ Representing 57,648 personal instalment loans made by three commercial banks during 1951* 80 As would be expected, the loans secured by co-maker notes were slightly larger than the unsecured loans. Loans secured by chattel mortgages were larger than either the unsecured or the co-maker notes. Length of Loan Contracts Before observing the contractual maturities of con sumer Instalment loans, reference should first be made to the federal limitations on maximum maturities during the 1950-1951 period. Federal Regulation was In effect 13 months and 13 days of that 21*. month period. During nine and one-half months of that two year period, the length of loan contracts was limited to 1 5 months and for approx imately six months the maximum maturity was 18 months. Regulation W limitation on maximum maturity varied during these years as follows: January 1, 1950 — September 1 7 . 1950 No Regulation September 18, 1950 — October 1 5 # 1950 18 months October 16, 1950 -- July 30, 1950 15 months July 31* 1951 — December 31# 195^ 3-8 months 33 Consumer Credit Regulation W was first Issued by the Board of Governors of the Federal Reserve System on August 21, 19Ul« This first version of Regulation W set up the minimum down payments for 2 5 classes of commod ities and provided a maximum period of 1 8 months for the repayment of the balance. The regulation was first re vised May 6, 19^2 &nd has been revised many times since. 8l Not all loans inada by consumer instalment lenders were included under the above limitations. Loans made Tor medical or educational purposes were permitted longer maturities; nevertheless* the above maturity limitations must be kept in mind when considering the length or loan contracts of the principal lenders. Data from thirteen personal finance companies* ten commercial banks* and four credit, unions regarding the distribution of loans by contractual maturity are shown in Table 114. and depicted In Chart X X I * It is readily seen that personal finance companies favor longer duration of loans. Approximately one-third of the loans of personal finance companies were for 1 9 months or longer* while 10 per cent of credit union loans and less than per cent of the commercial bank loans were for 1 9 months or longer. That credit unions favor shorter maturities is shown by the fact that one-third of their loans are for 6 months or less. Almost two-thirds of all personal Instalment loans of commercial banks were for 12 months* while only approximately 9 per cent of personal finance company and credit lull on loans were for 12 months. The majority of personal finance company loans were extended for 1 5 to 1 8 months* the majority of conanercial bank loans were for 1 2 months* while the majority of credit union loans were for less than 12 months. TABLE lit CLASSIFICATION OF LOANS BY CONTRACTUAL MATURITY BY THE PRINCIPAL TYPES OF CONSUMER INSTALMENT LENDING INSTITUTIONS 1950 - 1951 Personal Finance Commercial Companies* fiankab Credit Unions0 Length of Number of Number of Number of Loan Contract Loans Per Cent Loans Per Cent Loans Per Cent 6 Months or Less 201,008 3.11 8,615 4.26 4,956 33.37 7 — 11 Months 105,904 1.64 2,570 1.27 2,803 18.87 12 Months 546,726 8.45 128,684 63.64 1,450 9.76 13 — 18 Months 3,529,475 54.56 54,541 26.97 4,161 28.02 19 Months and Longer Terms 2.085.902 32.24 7.814 3.86 9.98 Total 6,469,015 100.00 202,224 100,00 14,853 100.00 a Represented by thirteen personal finance companies. b Represented by ten commercial banks. c Represented by four credit unions. 8 3 CHART XII CLASSIFICATION OF LOANS BY CONTRACTUAL MATURITY BY THE PRINCIPAL TYPES OF CONSUMER INSTALMENT LENDING INSTITUTIONS 1950 - 1951 PER CENT 0F 10*MS 70 60 50 HO 30 *0 10 6 mo*, or le»» 7-11 month* 'th» 13-18 month* 19 mo*, and over Source: Table •f Personal Finance Comme rc i al Cred i t Compan ie* Banks Un ions &k A notable difference was observed between commarclal banks and personal finance companies In regard to the average size of loan extended by the contractual maturity. It may be observed In Table 15 that the average size of loan made by personal finance companies Increased as the length of the loan contract was extended. This ranged from an average loan size of $6 0 .6 6 for loans of six months or less to for l°&ns of 19 months or longer. On the other hand, this pattern of loan behavior is not observed in commercial bank loans. In the commercial banking field, the average size of loan was f°r loans of six months or less, and only $5 5 i|-*bO for loans of 1 9 months or longer* The largest average size of commercial bank loan was for loans of I? to Id months. It is apparent from the Information set out above that there are vast differences In loan characteristics from each of the principal consumer instalment lending institutions. Further analysis of the differences between lenders will be made in Chapter IV; emphasis there, how ever, will be placed on the characteristics of the borrowers. 8 5 TABLE 15 AVERAGE SIZE OF LOAN BY CONTRACTUAL MATURITY BY THE TWO PRINCIPAL TYPES OF CONSUMER INSTALMENT IENDING INSTITUTIONS 1951 Average Size Loan Length of Personal Finance Loan Contract Companies* Conmercial Banks 6 Months or Less $ 80.68 $ 489*86 7 —- U Months 102.92 578.01 12 Months 141.25 363.83 13 — 18 Months 311*28 834.88 19 Months and Over 444.50 354.60 Representing 1,051,406 loans made by four personal finance companies during 1951* b Representing 39,022 personal instalment loans made by two com mercial banks during 1951* CHAPTER IV CHARACTERISTICS OP THE BORROWERS OP CONSUMER INSTALMENT LOAN FUNDS Who are the people upon whom the consumer instalment lenders depend Tor patronage? What Jobs do they have and how much income do they receive? In this chapter an analysis is presented of the persons who obtain consumer instalment loans classified in accordance with their occupation* in come* age* sex and marital status* A comparison of the characteristics of the borrowers from the principal consum er instalment lenders also is presented. Occupation of Borrowers In the statistical investigation of applications for consumer instalment loans included in this study* a diligent effort is made to classify all borrowers on an occupational basis* Information on the occupation of borrowers was obtained from ^2 consumer Instalment lending companies reporting on 6,57^*943 borrowers. The occupa tional classification of borrowers appears In Table 16 and is illustrated in Chart XIII* The two most predominant occupation groups1 borrow- 1------An alphabetical index consisting of 227 occupation categories* arranged in 11 major occupation groups is presented in Appendix C* Each occupation category con sists of a homogenous group of occupation titles and de fines a particular field of work. 86 87 TABLE 16 OCCUPATION OF BORROWERS FROM THE PRINCIPAL TYPES OF CONSUMER INSTALMENT LENDING INSTITUTIONS 1950 — 1951 Personal Finance Commercial Credit Companies4 Banksb Unions0 Occupation Number of Number Number Groups Loans Per Cent of Loans Per Cent of Loans Per Cent Craftsmen, Foremen, and Kindred Work ers 1,526,465 23.73 U , 485 32.22 1,606 10.81 Operatives and Kindred Workers 1,959,825 30.46 13,143 10.21 7,717 51.96 Laborers, Except Farm and Mine 762,867 11.86 1,076 .84 892 6.01 Clerical and Kindred 527,771 8.20 17,255 13.40 2,972 20.01 Sales Workers 225,724 3.51 11,331 8.80 336 2.26 Professional, Tech nical, and Kindred Workers 181,827 2.83 6,785 5.27 146 .98 Managers, Officials > and Proprietors, Except Farm 591,480 9.19 28,366 22.03 574 3.86 Farmers, Farm Man agers, and Farm Laborers 73,206 1.14 125 .10 Service Workers, Protective, Do mestic, and Others 464,871 7.23 3,807 2.96 604 4.07 Unemployed, Pensions or Independent Incomes 98,714 1.53 321 .25 Occupation Not Re ported 20,594 *22 5,05.2 3-12 6 .04 Total 6,433,344 100.00 128,746 100.00 14,853 100.00 a Represented by thirteen personal finance companies. b Represented by the personal instalment loans of fifteen commercial banks. c Represented by four credit unions. 8 8 CHART XIII PERCENTAGE DISTRIBUTION OF THE OCCUPATION OF BORROWERS PROM THE PRINCIPAL TYPES OF CONSUMER INS1ALMEN1 LENDING INSTITUTIONS 1950 - 1951 PER CENT Craftsmen, Foremen and Kindred Laborer! Clerical and Kindred Salee Worker! Persons! Finance Companies Commercial lank* Profe!!iona1, Technical and Kindred Credit Unions Manager!, Official! and Proprietor! Farmer! Service Worker! Unemployed Not Reported Source: Table ft 89 Ing from personal finance companies were, first, operatives and kindred workers, and second, craftsmen, foremen, and kindred workers. These two occupation groups represent 5^ per cent of the borrowers from personal finance companies. With commercial banks the two most predominant occupation groups were, first, craftsmen, foremen, and kindred workers, and second, managers, officials, and proprietors. These two occupation groups also represent 5^4- Per °®nt of the personal instalment borrowers from commercial banks. In the credit union field, operatives and kindred workers rep resented slightly over fifty per cent of all borrowers, while the second most important occupation group comprised clerical and kindred workers. The craftsmen group and the operatives group were important occupation groups for each of the lenders. Clerical and kindred workers were also an important occupation group for each of the lenders, being relatively more important for credit unions than for com mercial banks or personal finance companies. Farming was a very minor occupational source of demand in the case of each of the three principal lending institutions. Perhaps the most significant fact brought out from the data presented in Table 16 can be observed if the occupations of borrowers are reclassified under the two major headings: "white collar* workers and manual workers. Under the "white collar" workers are Included clerical 90 and kindred workers; sales workers; professional, techni cal and kindred workers; and managers, officials and proprietors. Under manual workers are Included craftsmen, foremen and kindred workers; operatives and kindred work ers; laborers; farmers; and service workers. Commercial banks are placing more emphasis on loans to "white collar* workers than either of the other princi pal consumer instalment lending institutions. To "white collar* workers, commercial banks make one-half of their personal instalment loans while personal finance companies make less than one-fourth of their loans to such workers. Personal finance companies and credit unions are primarily serving manual workers, those workers with lower incomes. Personal finance companies make three out of four loans to manual workers, whereas commercial banks make less than one-half of their personal instalment loans to manual workers• The one exception to the above is found in the class ification, "craftsmen, foremen and kindred workers," Com mercial banks are extending to these workers a larger pro portion of their loans than either personal finance companies or credit unions, The explanation is that in recent years craftsmen, foremen and kindred workers have received higher incomes than many of the "white collar" workers. This again emphasizes the fact that commercial 91 banks are primarily serving the better credit risks in the consumer Instalment loan market• If from the manual workers classification, loans made to craftsmen, foremen and kindred workers are removed, the above conclusions are more obvious. Such a classifi cation would include operatives and kindred workers, laborers, farmers and service workers. The highest Income borrowers of the manual workers group, craftsmen and fore men, would be excluded. To operatives and kindred workers, laborers, farmers and service workers, personal finance companies and credit unions extended more than one-half of their loans, while only li4-.ll per cent of the personal instalment loans of commercial banks were made to these borrowers. Clearly, personal finance companies and credit unions are more adequately serving those borrowers with generally lower incomes than ire commercial banks. The question has sometimes been raised -- and answers given without factual data — which of the principal con sumer instalment lending institutions most adequately serves the entire civilian labor force of the United States. It has previously been shown that each of the principal lenders are serving certain segments of the labor force more adequately than others. It should be of interest, however, to compare the percentage distribution 92 of the occupations of the civilian labor force for the United States and the percentage distribution of the occupations of the borrowers from the principal types of consumer instalment lenders. Such a comparison is present ed in Table 1 7 . The occupational distribution of borrowers from personal finance companies is in closest proximity with the occupational distribution of the civilian working popula tion. The two occupation groups of borrowers from personal finance companies showing the widest variance from the occupational distribution of the civilian labor force are, (1 ) craftsmen, foremen, and kindred workers and (2 ) operatives and kindred workers. The two groups of borrow ers from commercial banks which show the widest variance from the occupational distribution of the civilian labor force are, (1 ) craftsmen, foremen, and kindred workers and (2) managers, officials, and proprietors. Clerical workers and sales workers as borrowers of personal in stalment loans from commercial banks follow the civilian labor distribution more closely than in the case of bor rowers from personal finance companies. In the credit union field, the major variance with the occupational distribution of the civilian labor force is In the class!- 95 TABLE 17 COMPARISON OF THE PERCENTAGE DISTRIBUTION OF THE OCCUPATIONS OF THE EXPERIENCED CIVILIAN LABOR FORCE FOR THE UNITED STATES AND THE PERCENTAGE DISTRIBUTION OF THE OCCUPATIONS OF THE BORROWERS FROM THE PRINCIPAL TYPES OF CONSUMER INSTALMENT LENDERS 1950 — 1951 Personal Occupational United States Finance Commercial Credit Groups Labor Forcea Companies Banks Unions Craftsmen, Foremen, and Kindred Workers 13.38 23.73 32.22 10.81 Operatives and Kindred Workers 20.90 30.46 10.21 51.96 Laborers, Except Farm and Mine 6.50 11.86 .84 6.01 Clerical and Kindred 12.60 8.20 13.40 20.01 Sales Workers 6.25 3.51 8.80 2.26 Professional, Tech nical, and Kindred Workers 7.52 2.83 5.27 .98 Managers, Officials, and Proprietors, Except Farm 10.20 9.19 22.03 3.86 Farmers, Farm Managers, H o and Farm Laborers 11.60 1.14 • Service Workers, Pro tective, Domestic, and Others 11.05 7.23 2.96 4.07 Unemployed, Pensions, or Independent Incomes 1.53 .25 Occupation Not Reported .32 3.92 .04 Total 100.00 100.00 100.00 100.00 * Annual Report on the Labor Force——1950. Bureau of the Census Current Population Report, Series P-50, Number 31, p. 4, and Annual Report on the Labor Force— 1951. Bureau of the Census Current Population Re port, Series P-50, Number 40, p. 4. b Table 20. 9^ fication operatives and kindred workers; there are, how ever, large variances In the case of all of the occupation classifications of borrowers from credit unions. As would be expected, the average size of loan is different for each of the various occupation groups. Table 18 and Chart XIV show that managers, officials, and pro prietors are granted the largest instalment loans in the case of personal finance companies. Personal finance companies grant their second largest loans to sales workers, and their third largest loans to craftsmen, foremen, and kindred workers. Commercial banks also grant their largest personal Instalment loans to managers, officials, and proprietors; their second largest loans are to pro fessional, technical, and kindred workers; and their third largest are to sales workers. The smallest loans are granted to laborers In the case of personal finance companies, and to service workers in the case of commercial banks. In the previous chapter, it was shown that the aver age size personal instalment loan made by commercial banks was nearly $300 larger than the average size loan made by personal finance companies. Not only is the average size loan larger for commercial banks, but the average size loan in each occupational classification is larger for 95 TABLE 18 AVERAGE SIZE LOAN BY OCCUPATION OP BORROWER 1951 ______Average Size Loan Personal Finance Commercial Occupational Groups Companlesa Banks^ Craftsmen, Foremen, and Kindred Workers $ 2 7 4 .5 2 $4 7 6 .2 5 Operatives and Kindred Workers 259.77 577.04 Laborers, Except Farm and Mine 207.84 551.65 Clerical and Kindred 258.21 388.05 Sales Workers 2 7 8 .4 5 5 2 2 .2 3 Professional, Technical, and Kindred Workers 2 7 0 .4 2 596.57 Managers, Officials, and Proprietors, Except Farm 5 0 5 .4 1 8 7 9 .5 4 Service Workers, Protective, Domestic, and Others 2 1 2 .9 6 515.18 Occupation Not Reported 2 1 9 .2 5 4Jjlj .6 6 a Representing 560,214 loans made by three personal finance companies during 1951• u Representing 46.554 personal instalment loans made by two commercial banks during 1 9 5 1 * 96 CHART XIV AVERAGE S I Z E LOAN BY OCCUPATION OF BORROWER 1991 OCCUPATIONAL BEOUP Craftsmen, foremen, and Kindred Workers Operative* end Kindred Worker* Personal Finance Companies Laborers, except fare and eine Commercial Banks Clerical and Kindred Sales Worker* Professional.Technics and Kindred Worker* Managers, O fficials, and Proprietors Service Workers Occupation Not Repo rted T — ----- ’----- r . iOO $ 6 0 0 $900 AVERAGE SI2E OF LOAN Source: Table / t 97 commercial banks than Tor personal finance companies. There are several factors accounting for this difference In average size of loan extended by the principal lending institutions. The maximum legal limitations are an import ant part of the explanation. For example, the average size personal instalment loan granted by commercial banks to managers, officials and proprietors was approximately $575 larger than loans made by personal finance companies to borrowers in this occupational group* The laws of prac tically all states do not permit personal finance companies to make loans of such large size* It is also probable that commercial banks are appeal ing to a higher Income group within each separate occupation al classification. To illustrate, the average size loan made by commercial banks to laborers and service workers was more than $100 larger than the average size loan made by personal finance companies to the same occupational groups. Although commercial banks were extending relative few loans to such workers, the average size loan Indicates that these borrowers had higher incomes than borrowers from personal finance companies In the same occupational groups* It is also probable that in some cases such bor rowers from commercial banks were required to pledge higher valued security than similar borrowers from personal 98 finance companies. The importance of the monthly income of the borrower is treated in the following section. Monthly Income of Borrowers The principal consumer lending institutions restrict their loans to those applicants whose positions and in comes are believed to warrant the use of credit on the scale involved, and they limit the size of the loan to a sum considered to be within the capacity of the borrower to repay. Good operating technique for all instalment lend ing Institutions makes it a cardinal point to limit the size of the loan within bounds that will permit the borrower to repay from his monthly income. Since the repayment of con sumer instalment loans depends primarily on the monthly income of the borrower, that factor is one of the most important of the borrower characteristics to be taken Into consideration by a loan official in passing on a credit risk. Table 19 and Chart XV show the numerical and per centage distribution of borrowers by monthly income in the case of the principal consumer instalment lending institu tions. Of the various income classifications, the great est number of borrowers from personal finance companies and credit unions have monthly incomes from $2 5 0 . 0 1 to TABLE 19 MONTHLY INCOME OF BORROWERS FROM THE PRINCIPAL TYPES OF CONSUMER INSTALMENT LENDING INSTITUTIOMS 1950 — 1951 Personal Finance Ccnmercial Companies4 Banks Credit Unions0 Number of Number of Number of Monthly Income Loans Per Cent Loans Per Cent Loans Per Cent $ 00.01 to $ 100 68,696 1.01 209 .19 6 .04 100.01 to 150 273,631 4.02 2,297 2.10 116 .82 150.01 to 200 948.6U 13.95 8,612 7.86 2,146 15.17 200.01 to 250 1,410,397 20.74 14,978 13.67 3,797 26.85 250.01 to 300 1,607,977 23.64 22,656 20.68 3,947 27.91 300.01 to 400 1,520,414 22.35 27,925 25.48 3,146 22.24 400.01 to 600 808,327 11.88 22,632 20*65 828 5.86 Over $ 600 159,928 2.35 6,933 6.33 157 1.11 Not Reported _ 3,700 .06 3,333 3.04 Total 6,801,711 100.00 109,575 100.00 14,143 100.00 a Represented by fourteen personal finance companies. b Represented by the personal instalment loans of twelve commercial banks. c Represented by three credit unions. vo vo 100 CHART XV PERCENTAGE DISTRIbUTION OF bORRONERS BY MONTHLY INCOME FROM THE PRINCIPAL TYPES OF CONSUMER INSTALMENT LENDING INSTITUTIONS 1350 - 1951 PER CERT I L Under *100.31 *150.01 *4)0.01 *350.01 *400.01 *400. 01 ver N o t *100 to to to >600 Reported *150 *300 *603 Source: Table / f MONTHLY INCOME OF BORROWERS Pereone) Finance Coepan iea Commercial 3anks Credit Unions 101 $5 0 0 , while the greatest number of borrowers from commer cial banks have monthly incomes from $ 5 0 0 . 0 1 to $14.0 0 . The majority of personal instalment borrowers from commer cial banks have monthly incomes in excess of $3 0 0 , whereas 63 per cent of the borrowers from personal finance companies and 7 1 Per cent of the borrowers from credit unions have monthly incomes of $300 or less. Although this does not mean that the lenders are appealing to entirely different markets, it does point to a certain division in the con sumer Instalment lending market in which the principal lenders are directly competing. As further evidence of the segregation of the markets, 27 per cent of the personal instalment borrowers from com mercial banks had monthly incomes in excess of $14.0 0 , where as approximately 20 per cent of the borrowers from personal finance companies had monthly incomes of $ 2 0 0 or less. On the basis of the monthly incomes of the borrowers, as well as the occupational classifications previously presented, it is believed the principal lenders do compete for a cer tain segment of the market. The difference in the markets of the principal lending Institutions is one of degree on the basis of the risk quality as between the different income groups and between different occupational groups, as well as within a single occupational group. Table 20 and Chart XVI show that within the legal 102 TABLE 20 AVERAGE SIZE LOAN BY MONTHLY INCOME OF BORROHHl 1951 Average Size Loan Personal Finance Monthly Income Companies* Commercial Banks*3 00.01 to $ 100 $ 156.75 $ 238.00 100.01 to 150 184.00 262.05 150.01 to 200 223.52 264.75 200.01 to 250 259.43 325.13 250.01 to 300 286.66 353.37 300.01 to 400 318.20 416.02 400.01 to 600 366.05 604.25 Over $ 600 436.60 993.43 Not Reported 188.67 818.47 a Representing 4 ,665*890 loans made by six personal finance companies during 1951* ^ Representing 46,354 personal Instalment loans made by two com mercial banks during 1951* 105 CHART XVI AVERAGE SIZE LOAN BY MONTHLY INCOME OF BORROWER 1051 MONTHLY INCOME 100.01 to I 60 Personal Finance Coapaniea Commercial 3anka 160.01 to 200 2 0 0 . 0 I to 260 260.01 to 300 300.01 to 600 <400.0 1 to 600 Ovor $600 N o t Reported $2ob $iSi loJo laEo liooJ AVERAGE SIZE LOAN S o i ' p c o : T a b l o %j 0 104 maximum loan limitations the amount or money borrowed gen erally depends upon the monthly income of the borrower. The larger the monthly income, the larger, on the average, the size of the loan. Until a monthly income of more than $ 4 0 0 Is reached, the average size of loan made by personal finance companies increases by approximately $ 5 0 as the monthly income of the borrower Increases by $50. This does not mean that the average size of loan is less than the monthly income of the borrower. As a matter of fact, the average size of loan, was in excess of the monthly in come of personal Instalment borrowers from commercial banks in all classifications, and the average six* of loan was in excess of the monthly income of the borrowers from personal finance companies until the monthly income of the borrower was greater than $2 5 0 . To illustrate clearly the close correlation between the size of the loan and the monthly Income of the borrow er Chart XVII compares the average size of loan granted by six large personal finance companies with the average monthly Income of borrowers in each income classification. The ratio of average size of loan compared to average monthly Income of borrowers is also presented in Table 21. There is a definite tendency for the si ze of the loan to increase as the Income of the borrower Increases. 105 TABLE 21 AVERAGE SIZE OF LOAN COMPARED TO THE AVERAGE MONTHLY INCOME OF BORROWERS IN EACH INCOME CLASS BY SIX LARGE PERSONAL FINANCE COMPANIES 1951 Average Size Average Monthly Monthly Income of Loan Income Ratio $ 00.01 to $ 100 $ 156.75 $ 88.95 1.76 100.01 t o 150 184.00 136.28 1.35 150.01 to 200 223.52 185.96 1.20 200.01 to 250 259-43 230.18 1.13 250.01 to 300 288.86 279.97 1.03 300.01 to 400 318.20 344.41 .92 400.01 to 600 368.05 447.77 .82 Ove r $ 600 436.60 651.70 •67 Total Average 244.42 303.00 .81 Source: Six personal finance companies representing 4*665,890 loans made during 1951* VRG SIZE O LA CMAE T TE VRG MNHT NOE F BORROWERS OF INCOME MCNTHLT AVERAGE THE TO COMPARED LOAN OF E Z I S AVERAGE Average $ i re of Loam O 0 4 too 400 oo to to Sou rce: Table Table Sou rce: t too y x Lar Fi mpanies om C e c n a in F l a n o s r e P e rg a L ix S By It IN EACH INCOMF r L A S S I FI CATION FI I S S A L r INCOMF EACH IN too HR XVII CHART vrg Mnhy Income MonthlyAverage too 1951 400 too • • OO TOO 106 107 As the income of the borrower increases his standard of living is raised and a larger loan is often needed* As indicated in the following chapter* the larger loans are frequently extended for different purposes than smaller loans. The funds of the larger loans are often used to purchase home appliances or to refinance their present notes* whereas the small loans are used to purchase clothing* fuel or to pay medical expenses. The amount of money needed to meet even such an emergency as illness may increase as the income becomes larger since higher income families may wish medical treatment by specialists rather than by the general practitioner. It should be noted that the size of the loan does not increase as rapidly as, and does not keep pace with* the increase in the income of the borrower. It is seen in Table 21 that the ratio of the size of the loan to the average monthly income in the income classification $500.01 to $100 was I.7 6 . The ratio of average size of loan to average monthly Income decreased in each Income classification until the ratio of .6 7 was reached in the Income classification of over $ 6 0 0 monthly income. Borrow ers with monthly incomes around $ 9 0 tend to borrow a sum in excess of $1 5 0 , while borrowers having monthly Incomes in the neighborhood of $1^50 borrow* on the average, only 108 slightly more than $350• Although the standard or living Is raised as the Income Increases, the amounts needed for the different loan purposes do not Increase as rapidly as the Income of the borrower. To Illustrate, if the higher income borrower desires to purchase a refrigerator, he may select a more expensive model than the lower income borrow er. Even so, the more expensive refrigerator does not represent as large a proportion of the earnings of the higher income family as the purchase of a less expensive model by the lower income family. A comparison was made of the monthly income of bor rowers from personal finance companies in those states having a legal loan maximum of $ 3 0 0 with the monthly in come of borrowers in those states which permit larger loans. This analysis revealed that approximately I4.2 per cent of the borrowers in states with a $ 3 0 0 loan maximum have monthly incomes of $<^50 or less. In states having loan maximums in excess of $5 0 0 , less than one-third of the borrowers from personal finance companies had in comes of $ 2 5 0 or less.^ These facts demonstrate that the raising of the loan maximum for personal finance companies permits personal finance companies to render service to 2 ------Based on information concerning 3*022,7iUj- bor rowers from five personal finance companies. 109 a larger portion of the population. An analysis was also made of the other major char acteristics of borrowers from personal finance companies In states with a $ 3 0 0 loan maximum in comparison with the characteristics of borrowers in states which permit larger loans. There were differences observed, but they were no more pronounced than differences in characteristics of borrowers in the individual states included within each of the two classifications referred to above. It is be lieved that other factors attributed more to these differ ences than the loan limit of the state; for that reason, such information has not been included. It was suspected that the personal instalment loans of commercial banks secured by automobiles might reveal a different income group of borrowers than was the case with all personal instalment borrowers from commercial banks. In an attempt to verify this suspicion, an analysis was made of the personal instalment loans secured by automo biles in contrast with all personal instalment loans of one large commercial bank that had been found to be reasonably typical of the commercial banks presented in this study. This analysis included all personal instal ment loans made by this commercial bank during 1951. It should be understood that in this analysis a comparison was made of one specific group of personal instalment 110 loans, those secured by automobiles, with the character istics or all personal Instalment loans. The personal Instalment loans that were secured by automobiles were not made for the purpose of purchasing an automobile. Although all of the major characteristics of the bor rowers were analyzed, most of the characteristics conform to the overall picture of the borrowers of personal instal ment loans. The only factors worthy of mention, other than monthly Income of borrowers, are the occupation of borrowers and size of the loans that were granted. A substantially larger proportion of the personal instalment loans secured by automobiles were of the occupation group managers, officials, and proprietors than was true of the sample of all personal instalment loans. Regarding the size of loans that were made, the personal instalment loans that were secured by automobiles were considerably larger than was true of all personal instalment loans. Only 32.60 per cent of all personal instalment loans that were made by this commercial bank were for amounts in excess of $ 5 00# whereas 7 6 . 2 0 per cent of the personal instalment loans secured by automobiles were for amounts ------3------This fact has been previously shown in the case of both commercial banks and personal finance companies in Table 13. Chapter III, concerning the average size of loan by type of security. I l l in excess of $ 5 0 °• It was found that the monthly incomes of the borrow ers of personal instalment loans secured by automobiles were substantially larger than the monthly incomes of all personal instalment borrowers from this commercial bank. Only 2 7 .6 per cent of all personal Instalment borrowers had monthly incomes in excess of $14.0 0 , whereas 14.3 * 6 per cent of the borrowers of personal Instalment loans secured by automobiles had monthly Incomes in excess of $14.0 0 * To be sure, the borrower that offers an automobile as security for his loan owns the automobile. Also only recent model automobiles are considered to have a loan value. The fact that the borrower owns a recent model automobile would indicate that such borrowers had higher incomes or had been better managers of their incomes than was true of all personal instalment borrowers. This information might well point to a more profitable person al instalment loan market for all commercial banks, or at least should be worthy of individual analysis by com mercial bankers. An analysis similar to the above was also made in the case of one large personal finance company; however, the results were not as striking al though the trend was in the same direction. 112 Age of Borrowers Examination of the age of borrowers of consumer in stalment loan funds was made for the purpose of obtaining a comparison among the lenders. The age of the borrower is closely interconnected with other attributes of the borrower; nevertheless, this analysis is not intended to imply that age is a determining factor in making a person a borrower or a major factor in the selection of credit risks. Table 22 and Chart XVIII present the numerical and percentage age classification of borrowers, by five year intervale, from the principal consumer instalment lending institutions. The predominant age classification of borrowers from personal finance companies was 2b to 30 years, while the most frequent age classification of borrowers from both commercial banks and from credit unions was 31 to 35 years. Approximately one-third of the borrowers of con sumer instalment loan funds from each of the principal lending Institutions are from 31 to 1+0 years of age. Beyond this fact there is little agreement among the principal lenders with respect to the age of their borrow ers. Borrowers of the age of 30 or younger comprise 20 per cent of the personal Instalment loan borrowers from commercial banks, 30 per cent of the borrowers from TABLE 22 AGE OF BORROWERS FROM THE PRINCIPAL TYPES OF CONSUMER INSTALMENT LENDING INSTITUTIONS 1950 - 1951 Personal Finance Commercial Companies* Banks Credit Unions0 Number of Number of Number of Age of Borrower Loans Per Cent Loans Per Cent Loans Per Cent Under 21 yrs. 894 .11 15 .01 478 4*61 21 yrs. to 25 yrs. 92,352 10.97 13,769 6.62 1,973 19.02 26 yrs. to 30 yrs. 161,866 19.23 28,930 13.90 1,710 16.50 31 yrs. to 35 yrs. 147,839 17.56 34,551 16.60 2,105 20.29 36 yrs. to AO yrs. 124,791 14.82 31,705 15.23 1,338 12.90 A1 yrs. to 45 yrs. 102,358 12.16 31,291 15.04 672 6.48 46 yrs. to 50 yrs. 89,437 10.63 30,427 14.62 853 6.22 51 yrs. to 55 yrs. 65,449 7.78 19,624 9.43 739 7.12 56 yrs. to 60 yrs. U , 359 4.91 12,625 6.07 379 3.65 Over 60 yrs. 2./|£ 126 1.21 Total 8U,716 100.00 208,093 100.00 10,373 100.00 a Represented by nine personal finance companies. b Represented by the personal instalment loans of thirteen coowrcial banks. 113 c Represented by three credit unions. 114 CHART XVIII PERCENTAGE DISTRIBUTION OF BORROWERS BY AGE FROM THE PRINCIPAL TYPES OF CONSUMER INSTALMENT LENDING INSTITUTIONS 1950 - 1951 PER CERT Personal Finance Con pan I n s Co Credit Unions Under 21 yrs. Over 21 yrs. 2b*** yr*. 30 $S AQE OF SORROWERS Source: Table It. 115 personal finance companies, and A*.0 per cent of the bor rowers from credit unions. Borrowers over the age of forty comprise 2 7 per cent of credit union borrowers, 37 per cent of personal finance company borrowers, and I4.7 per cent of commercial bank borrowers. These results are not surprising if reference Is made to the occupations of borrowers from the principal consumer instalment lending institutions. Commercial banks made more than one-half of their personal instalment loans to the occupation groups, managers, officials and proprietors and craftsmen, foremen and kindred workers• Many of the workers in such occupations are more than I4.O years old. Credit unions made more than JO per cent of their loans to the occupation groups, operatives and clerical workers. There are many young men and young women employed In these occupations. The age distribution of the borrowers from personal finance companies more nearly conforms to the age distribution of gainfully employed personal in the United States than Is true in the case of the bor rowers from either of the other principal lenders,^ It n ------The age classifications used by the Bureau of Census do not exactly conform with the age classifica tions used in this study. For the year 1951# 10,i|.l per cent of employed persons in the United States were from the ages 2 0 to 2I4. years, 2 3 *iA per cent from 25 to 311- years, 22.60 per cent from 35 to I4I+. years, and 1 8 , 7 8 P«r cent from lj.5 to 5I4. years. Annual Report On The Labor Force. 1951. Bureau of Census Current Population keport. Series P-5 O# Number JL|.0, May 1 9 # 1952, p. 18. 116 would therefore be expected that the age distribution of borrowers from personal finance companies would not rep resent the extremes as was true of commercial banks and credit unions. From the data regarding age of borrowers and occupation of borrowers it is evident that commercial bankers prefer to make loans to more established persons and this often means, among other things, older applicants. Sex and Marital Status of Borrowers Sex and marital status of borrowers from the prin cipal consumer instalment lending institutions is shown in Table 2J. For all joint loans to married couples the borrower selected for description was the male. The single men and single women classifications include single, widowed, divorced, and separated persons. More than JO per cent of the borrowers from each of the principal lenders were married and were living with their respective spouses. Eighty-three per cent of the borrowers from personal finance companies were married persons. A significant fact presented in Table 23 con cerns women borrowers. More than 20 per cent of the borrowers from commercial banks and credit unions are female, while only 8 per cent of the borrowers from per sonal finance companies are female. This difference be tween commercial banks and credit unions, on the one TABLE 23 SEX AND MARITAL STATUS OF BORROWERS FROM THE PRINCIPAL TYPES OF CONSUMER INSTALMENT LENDING INSTITUTIONS 1950 - 1951 Personal Finance Ccenercial Companies4 Banks Credit Unions0 Sex and Marital Number of Number of Number of Status Loans Per Cent Loans Per Cent Loans Per Cent Single Men 108,244 13.96 14# 928 9.96 2,189 14.74 Single Women 26,809 3.46 23,171 15.45 1,97S 13.32 Married Men 604,065 77.91 102,063 68.08 9,302 62.62 Married Women 36,229 - 4-67 -i-JS 1.384 9.32 Total 775,347 100.00 149,919 100.00 14,853 100.00 a Represented by eight personal finance companies, k Represented by the personal instalment loans of ten commercial banks. 7 1 1 c Represented by four credit unions. 118 hand, and personal finance companies, on the other. Is even more pronounced in the single women classification. Commercial banks granted 23*171 personal Instalment loans to single women out of the approximate 1 5 0 , 0 0 0 loans, while personal finance companies granted only 26,809 loans to single women out of the 775#557 loans represented. Obviously, commercial banks and credit unions are doing a better job in satisfying that part of the loan market composed of single women. Data regarding 3#80i|. rejected consumer Instalment loan applications, classified by sex and marital status of the applicant, are presented In Appendix D. One of the specific purposes of this rejected loan analysis was to determine the proportion of male and female applicants that was rejected by each of the principal lenders. Of the total applications rejected by personal finance companies only six per cent were applications from women, whereas 13 per cent of the rejects of commercial banks were women applicants. Personal finance companies are not rejecting a large proportion of loan applications from women. Instead, it seems that women borrowers prefer to patronize commercial banks and credit unions rather than personal finance companies. The fact that commercial banks and credit unions have a larger proportion of women borrowers is partially 119 explained by the occupations of borrowers from the princi pal consumer Instalment lenders. The two occupational groups having the largest number of females are clerical and sales workers. To such workers both commercial banks and credit unions made slightly more than 22 per cent of their total consumer Instalment loans, whereas personal finance companies made less than 12 per cent of their loans to clerical and sales workers. This fact Is certainly important In the explanation of the differences in sex and marital status of the borrowers from the principal lenders. It is, nevertheless, believed that personal finance companies should more seriously consider the importance of women as borrowers of consumer instalment loans. To further support such a contention, the results of this study concerning loan accounts charged to profit and loss, as presented in Chapter VI, seem to indicate that women are slightly better credit risks than men. Similar findings were presented by the National Bureau of Economic Research in their studies in consumer instalment financing concerning credit risks. Their conclusions were, "The classification of borrowers by sex and marital status indicates that women are better risks than men; and the superiority appears to be statistically significant.1*^ ------e------David Durand, Risk Elements In Consumer Instal- ment Financing. (New York, National Bureau of Economic*- Research; T^ZpT), p. 7^* 120 It Is evident from the Information presented In this chapter concerning the characteristics of the borrow ers of consumer Instalment loan funds that the business of making such loans is not confined to the Ignorant, the inexperienced, the oppressed, or the low income groups. All of the specialized fields of Industry through which modern civilization carries on Its multifarious activ ities are included. The occupations, incomes, and ages of the borrowers from the principal consumer instalment lending Institutions are spread over a large and varied field; in fact, nearly every sphere of human endeavor is represented. One can observe from the various tables and charts presented in this chapter that a division exists In the market of the principal consumer instalment lenders; however, it can also be observed that a certain degree of overlap In the characteristics of the borrowers from each of the principal lending Institutions is present. CHAPTER V SOURCE OP LOAN APPLICATIONS AND INTENDED USE OF LOAN FUNDS Most consumer instalment borrowing is brought about by a maladjustment, usually of a temporary nature, of income and expenditures. Cash instalment credit is used to meet emergencies and other needs which the borrower Is unable to satisfy at the moment from current Income or savings. When borrowing is necessary, how are the borrow ers attracted to a particular consumer Instalment lender and what use do the borrowers Intend to make of the loan funds? In an attempt to answer the first part of this question an analysis was made of the various sources of loan applications from the principal consumer Instalment lenders. To arrive at an answer to the second part of this question a classification was made of approximately seven million individual loan transactions by the intended use of the loan funds. Source of Appllcations For Consumer Instalment Loans All lenders ask the applicants whether they are present or former borrowers of their company. Many lend ers ask new applicants to state what attracted them to their office. Such Information was recorded for this 121 122 study whan It was available from the lenders whose records were examined. Information was recorded concerning only those applicants who received loans. This information is presented In Table 214.. All of the principal consumer lending Institutions made more than two-thirds of their loans to present or former borrowers. Commercial banks and credit unions make slightly more than two-thirds of their loans to present or former borrowers, while personal finance comp anies make 7 9 Per cent of their loans to present or former borrowers. The loan business of personal finance companies and credit unions is marked by a higher rate of refinancing than that of commercial banks. Fully 65 Per cent of the borrowers from personal finance companies and 53 per cent of the borrowers from credit unions are present borrowers, while only 2 7 per cent of the personal instalment borrow ers from commercial banks are present borrowers. This difference Is explained largely by the fact that the average income of commercial bank borrowers is sufficient to allow approximately three out of four to repay the loans before the needs which cause borrowing recur. However, borrowers from personal finance companies have lower average incomes than the borrowers from either of the other principal lenders, consequently they would be expected to have more frequent occasion to refinance TABLE 2k SOURCE OF APPLICATIONS FOR CONSUMER INSTALMENT LOANS BY THE PRINCIPAL TYPES OF LENDING INSTITUTIONS 1950 — 1951 Personal Finance Cam&ercial ComDaniesa Banks Credit Unions0 Number of Number of Number of Source Loans Per Cent Loans Per Cent Loans Per Cent Source of New Borrowers: Newspapers 171,544 13.56 2,421 4.74 Direct Mall 70,085 5.54 1,783 3.49 Radio and Television 48,959 3.87 1,287 2.52 Posters, Car Cards, and Window Displays 68,314 5.40 2,146 4.20 Telephone Directories 34,410 2.72 31 .06 Instalment Sales Conver sions or referred from another department of organization 80,079 6.33 1,803 3.53 Referred by present or A former borrowers 539,302 42.63 21,817 42.71 Merchant Recommends 197,605 15.62 All Others (includes unreported) 54*778 , V22 i h m ?8.75 Sub-total (New Borrowers) 1,265,076 100.00 51,082 100.80 New Borrowers 1,265,076 20.62 51,082 33.28 3,444 33.20 Present Borrowers 4,011,191 65.37 a ,190 26.84 5,509 53.11 Former Borrowers 859,966 61,203 39.88 1,420 13,69 Total 6,136,233 100.00 153,475 100.00 10,373 100.00 > ft Represented by fifteen personal finance companies. b Represented by the personal Instalment loans of eleven commercial banks. c Represented by three credit unions. d Includes both classifications, merchant recommends and referred by present or former borrowers. 12k their loans * The fact that 53 P©** cent of the borrowers from credit unions are present borrowers largely dis counts the charge made by those not informed in the con sumer instalment lending field that the amount of refinan cing of loans which personal finance companies engage in is excessive. It is known that credit unions attempt to get their borrowers out of debt as soon as possible and most personal finance companies follow a similar policy. It is not surprising that borrowers return again and again since the needs which cause borrowing are recurrent. A certain amount of refinancing and repeat borrowing is unavoidable• Connecticut. New York, and New Jersey are the only states which require personal finance companies to submit information to the state banking department with respect to repeat borrowing. An analysis of 985*718 personal finance company loans granted In Connecticut and New York during 195^ shows 6 6 .ipL(. per cent to be present borrowers, 1 5* 36 per cent to be former borrowers, and 1 8 .2 0 per cent to be new borrowers. 1 This information Is almost identical with that presented In Table 2l± pertaining to- 1------Report of the Super1ntendent of Banks for the State of New YorET for the year endingTTecember 51* i950* pT 511, and the Annual Report of the Bank Commissioner for the State of* 6onn'ectlcut, "Tor the year ending September-56, I95O, p. 125 the operation of the personal finance companies Included in this investigation. New Jersey requires all licensed personal finance companies to maintain a record of the actual number of re- } newals for each borrower and annually submit to the New Jersey State Department of Banking the number and amount of first, second, third, and fourth or more renewals. This information from the State of New Jersey Department of Banking is submitted below for 1950* TABLE 25 LOANS MADE TO PRESENT BORROWERS IN STATE OP NEW JERSEY BY NUMBER OP RENEWALS I95O Number of Number Amount of Previous Per Cent Renewals of Loans Balance of all Loans Paid Loans First Renewals 65.331 #1 7 ,1514.. 575 • 11 # 9A 53.0 1 8 .2 0 1 7 .4 6 Second Renewals 38,249 1 1 .0 7 6 ,2 9 9 .8 7 6 .685 ,5314.. 90 1 0 .5 4 Third Renewals 26,647 8 .014.6 ,5514., 69 5 .I6 9A 8 9 A 6 7-35 Fourth or More Renewals iPiaSfk 3l.A8 5 .6i7 .Ol4 A . 1 9 8 .9 7 3 .8 0 2 7 .9 8 Total 229.751 7 0 ,7 6 2 .81414.. 7 1 4 5 .5 0 7 .0 1 8 .3 6 63.53 Source: Quoted from a letter from the Chief of Consumer Credit Division, State of New Jersey Department of Banking, dated May 15, 1952* 126 The total number of renewals as a per cent of all loans made by personal finance companies operating In New Jersey was 65*53 P®** cent as compared to 65*57 P®** cent for the fifteen personal finance companies operating in thirty-five states as reported in this study in Table 24. The number of first renewals accounted for more than one-sixth of all loans granted by personal finance companies operating in New Jersey during 1950 and the fourth or more renewals accounted for slightly more than one-fourth of all loans* It is significant that less than one-third of con sumer instalment borrowers from each of the principal institutions are new borrowers. Nearly one-third of the borrowers from commercial banks and credit unions are new borrowers, while approximately one-fifth of the bor rowers from personal finance companies represent new borrowers. The source of these new borrowers is also presented In Table 2 I4,. The source of new borrowers was not recorded for credit unions since none of the credit unions represented in this study ask the borrower for this information; however, since the majority of credit unions advertise very little It is believed that most of the new borrowers of credit unions were referred by present or former borrowers. Credit unions are required to confine their lending activity to members who are part 127 of a coherent group; therefore, it might be presumed that such organization would have no need to advertise. Such is not the case, however, when credit unions are formed in organizations where thousands of workers are employed. One credit union included in this study considers adver tising to be quite important and attributes their growth in a large measure to their advertising program. It was found that present and former borrowers re ferred l\2. per cent of the new borrowers of personal finance companies. Local merchants, and present and for mer borrowers referred per cent of the new borrowers of personal finance companies and I4.3 per cent of the new borrowers of commercial banks. The most important ad vertising media, as measured by the number of borrowers who stated that a particular media attracted them to the lender, for both personal finance companies and commer cial banks, ms newspapers. Instalment sales conversions accounted for 6 per cent of the new borrowers of personal finance companies. It should be noted that the classi fication "all other sources" which included those new borrowers where the source was not stated was very large. This was unavoidable since the source was not recorded for more than one-fourth of the new borrowers* In exploring the source of applications for con sumer Instalment loans it is of Interest to record the 128 experience of one personal finance company with, respect to the period of time between the date of discharge by a borrower of his loan obligation and the date when the same borrower makes a new loan. This study, made In 1951* covered a total sample of 6,2l4± former borrowers who had returned to one of the company's fifty branch offices located in Indiana, Illinois, Kentucky, and Virginia to obtain another consumer instalment loan. The study had the objective of determining how long the company should solicit a former borrower by direct mail advertising. The offices of the company were classified by the number of years in operation; ten years or more, five to ten years, and three to ten years; offices open less than three years are reflected only in the total of the fifty offices. The results of this study are shown in Table 26. Approximately 75 P®1* cent of those former borrowers who returned to this company for another loan did so with in twelve months. Fifty-six per cent of those returning for another loan did so within six months. Loan accounts which were active more than 36 months previously, account ed for only 8 per cent of the former borrowers requesting a new loan. The loan offices that had been opened 10 years or more showed only slightly higher activity in the older accounts than the more recently opened offices. The percentage difference is so small that it is not sig nificant. TABLE 26 ANALYSIS OF FORMS! BORROWER ACTIVITY 1951 Returned to Borrow Within Number of Months Shown Below: Offices Classified by 6 12 18 24 30 36 Longer Years in Operation Months Months Months Months Months Months Period Total All 50 offices Sample 6244 56.3 17.6 7.9 5.0 3.1 1.9 8.2 100.0 20 Offices open ten years or more Sample 3364 51.7 18.3 8.5 5.5 3.1 2.4 10.5 100.0 13 Offices open five years or more Sample 1835 56.1 16.9 7.4 5.3 3.6 2.2 8.5 100.0 13 Offices open three years or more Sample 873 67.9 17.9 8.0 3.7 1.8 .2 .5 100.0 Source: Quoted from a letter received from a personal finance company whose home office is located in Indiana, dated April 2, 1952. 130 This company reached the conclusion, based on the above findings, that time, energy, and money was wasted In soliciting former borrowers whose loan had been paid three or more years previously. The company further de cided that a former borrower whose loan had been paid within a year should be solicited more frequently than a borrower who had not applied for a loan in a period of one to three years. Before the company made this study, they had actively solicited by direct mall former borrowers who had received loans as long as ten years previously. Intended Use of Loan Funds The purpose of the loan as stated by the borrower In the loan application has been accepted in this study as the actual Intended use of loan funds. In some in stances the borrower may have concealed the true purpose of the loan; however. It is believed that those were the exceptional cases and that In most Instances the intended use as stated by the borrower is approximately correct. A classification of loans according to the Intended use made of the funds not only serves to indicate the various uses for which loans are extended, but it also suggests the dominant types of needs or emergency situa tions that are Immediately responsible for consumer In stalment loans. Distribution of approximately seven 131 million consumer Instalment loans by the intended use of loan funds is presented in Table 2 7 and Chart XIX. “Con solidation of overdue obligations" accounts for the largest proportion of loans granted by commercial banks and by personal finance companies. In the credit union field, "consolidation of overdue obligations" was recorded as the second most important use of loan funds, the most Important use being "automobile expense." The second most frequently stated purpose for loans from personal finance companies and commercial banks, and the third in Importance as stated by the borrowers from credit unions, was "medical, hospital, dental, or funeral expense." The rather broad classification "clothing, food, rent, fuel, and moving expense" accounts for approximately 10 per cent of all loans granted by personal finance companies and by commercial banks, but for less than five per cent of the loans granted by credit unions. "Home repair and improvement" was also an Important use of loan funds by the borrowers of personal finance companies and credit unions, but was relatively unimportant as stated by the personal Instalment borrowers from commercial banks. This Is explained by the fact that most commercial banks handle "home repair and improvement loans" in a separate department rather than In the personal loan department, unless the loan amount Is relatively small. TABLE 27 DISTRIBUTION OF LOANS BY INTENDED USE OF LOAN FUNDS BY THE PRINCIPAL TYPES OF CONSUMHt BJSTAI/5ENT LENDING INSTITUTIONS 1950 — 1951 Personal Finance Couaercial Companies Banks Credit Unions Number of Number of Number of Intended Use Loans Per Cent Loans Per Cent Loans Per Cent Pay a personal finance company loan 52,368** .79 4,525 1.96 1,834 6.16 Consolidate overdue bills 1,815,816 27.24 56,918 24.70 3,283 U.03 Refinance present note 225,630 3.38 6,323 2.74 758 2.55 Medical, hospital, dental, funeral 1,260,457 18.91 33,783 14*66 3,146 10.57 Clothing, food, rent, fuel, moving 678,728 10.18 a ,566 9.36 1,413 4.75 Taxes, mortgage, interest, insurance 386,770 5.80 7,956 3.45 699 2.35 Hone furnishings and appliances 179,464 2.69 15,569 6.76 2,647 8.90 Travel, vacation, education 480,355 7.21 6,755 2.93 958 3.22 Automobile expense 263,512 3.95 12,153 5.27 6,036 20.29 Home repair and improvement 514,238 7.71 7,009 3.05 1,965 6.60 Business needs 236,177 3.54 15,592 6.77 393 1.32 Buying home or real estate 1,401 .02 905 .39 1,450 4.87 Assist relatives 247,349 3.71 383 .17 148 .50 Miscellaneous . 4.87 .41,009 1,7*22 5,026 16.89 Total 6,666,824 100.00 230,446 100.00 29,756 100.00 a Represented by fourteen personal finance companies. H k Represented by the personal instalment loans of seventeen commercial banks. IV) c Represented by six credit unions. ^ To liquidate another personal finance company loan. 133 CHART XIX PERCENTAGE DISTRIBUTION OF LOANS BY INTENDED USE OF LOAN FUNDS BY THE PRINCIPAL TYPES OF CONSUMER INSTALMENT LENDING INSTITUTIONS 1950 - 1951 PER CENT INTENDED USE OF LOAN FUNDS 0 49 30 Pay personal Finance company 1 oan Consol idate overdue pi 111 Refinance present note Medical, hospital, dental, funeral Clothing, food, rent, fuel, moving expense taxes, mortgage, interest, insurance Personal Finance Companies Home furnishings and appl i ances Commercial danks Travel, vacation, education Credit Unions Automobile eipense Hone repair and improvement Business needs Buying home or real estate Assist relatives Mi seel Ianeous Source: Table J-7 131* The classification "miscellaneous uses* accounted for approximately 17 per cent of all personal Instalment loans extended by commercial banks and credit union, in dicating that these lenders do not require as careful a statement of reasons for borrowing as do personal finance companies. “Miscellaneous uses" accounted for less than five per cent of the loans made by personal finance companies• Of the fourteen classifications presented in Table 2 7 t the smallest number of loans granted by both commer cial banks and credit unions were for the purpose "assistance of relatives." The least important purpose for loans as stated by the borrowers from personal finance companies was the classification “buying home or real estate." This classification was also relatively unimport ant for the personal instalment borrowers from commercial banks, but accounted for nearly five per cent of all credit union loans examined. Many of the larger instalment lenders have made extensive use of data concerning distribution of consumer loans by intended use of loan funds in the direction of their advertising programs. Furthermore, careful examin ation of purposes by months for which loans are made has assisted some lenders in planning effective seasonal advertising programs. In order that an analysis by months 135 of the intended use of consumer instalment loan funds may be made, data are presented in Table 26 which includes all loans made during 19 5® by on® large personal finance company which for that year was operating approximately 200 offices located in 19 states. It may be observed that some of the purposes for which loans were made remained relatively constant during 1 9 5 0* however, most of the classifications were affected, in different degrees, by seasonal factors. To illustrate this seasonal variation, the classification "vacations'* ranked 13th in importance in January, February and March, 12th in April, Jtb. in May, 2nd in June and accounted for more dollar volume than any other stated purpose during the month of July, The significance of this fluctuation lies in the fact that most advertising programs stressing consumer instalment loans for vacation purposes are not initiated until late in the month of June, Following this analysis by months of Intended use of loan funds, this company starts its advertising program stress ing vacation loans in late April, There are several other seasonal variations shown in Table 26 worthy of observation. Even such an obscure purpose as "assistance to relatives," typically In 10th or 11th standing for this company, advanced to 5th place in December, It would seem that sentimental reasons near Christmas would account for a large part of this advance. table 2# ANALYSIS RY SOUTHS OF IHTEnOtO *JS£ OF LOIN FUNDS RT TIE RE»ROWE*S F*0»* ONE LAR3E PERSONAL FINANCE ClW ANr (in ttousjft'H of dolltri) I9SO 157 The necessity for clothing and heating preparations for the colder months and the increase in sickness particularly among older persons who are leas able to withstand the cold er temperatures would also account for a large portion of the increase in such loans. Loans made for educational purposes accounted for the smallest volume of the twenty- two purposes listed during several months. Luring August and September the volume of loans made for educational pur poses more than tripled. It Is Important that this In crease occurs In August, when preparations are being made for school, rather than In September when most lenders stress this purpose In their advertising programs. Table 29 and Chart XX have been constructed to show the comparative amounts borrowed for different purposes. The largest loans made by commercial banks were negotiated by those desiring to use the money for business purposes. Such loans are clearly not consumer Instalment loans; how ever, they were so classified by the commercial banks. It has previously been pointed out that the loans made for "business purposes" were not Included in this study when comparison was made of the loan volume of the princi pal consumer Instalment lenders. The largest loans granted by personal finance companies were for the purpose of paying another personal finance company loan. Although the average size of loan 158 TABLE 29 AVERAGE SIZE LOAN BY INTENDED USE OF LOAN FUNDS 1951 Average Size Loan Personal Finance Commercial Intended Use Companies4 Banks® Pay a personal finance company loan® $ 408.74 $ 489.00 Consolidate overdue bills 272.99 440.19 Re finance present note 286.66 509.02 Medical, hospital, dental, funeral 298.00 335.63 Clothing, food, rent, fuel, moving 248.03 391.15 Taxes, mortgage, interest, insurance 283.16 474.29 Home Furnishings and appliances 260.10 410.89 Travel, vacation, education 252.31 423.97 Automobile expense 330.77 475.49 Home repair and improvement 262.12 575.67 Business needs 362.23 1,100.92 Assist relatives 251.70 437.64 Miscellaneous 280.43 600.03 a Representing 1,203,068 loans made by four personal finance companies during 1951* ® Representing 4*6,35A personal instalment loans made by two commercial banks during 1951* 0 To liquidate another personal finance company loan. 139 CHART XX AVERAGE SIZE LOAN BY INTENDED USE OF LOAN FUNDS 1991 i H T E H P E D USE !*•>conpany personal loan finance Consolidate overdue bill* flefinence preaert note Medical,funeral hospital, dental, Pertonal Finance Companies Clothing,novirg espootefood. rent, fuel, Conneret a I Jan k a Taies.i n|u ranee-ortgage. interest, dcmeappt furni iancea thing* and r ravel, vacation, education &u to*o bi I e Ho«*eimprovement repair and Business needa Assist relative* Mi ace Ilaneout »d00 $t»oo AVERAGE **ooSIII LOU t u o o Source: Table I? li+o made by personal finance companies for this latter purpose was larger than any other classification, such loans accounted for less than one per cent of all personal finance company loans, as shown in Table 2 7 * The second largest average size of loan made by personal finance companies was for business purposes, while their third largest average size loan was for automobile expense. Average size loans for medical purposes were the fourth largest loans made by personal finance companies, while such loans were the smallest average loans made by commer cial banks; nevertheless, commercial bank medical loans were approximately $1+0 larger than personal finance company medical loans. The smallest loans made by personal finance companies were for clothing, food, rent, fuel, or moving expense. The average size consumer Instalment loan for per sonal finance companies by the intended use of loan funds ranged from $21+8 . 0 5 to $1+08.71+ and for commercial banks from $355*63 to $ 5 7 5 .6 7 . Knowledge of the average size of loan by Intended use of loan funds permits the institu tions to direct their lending activity to the more profit able loans. To be sure, the larger loans would tend to be more profitable for most lenders. On the other hand, personal finance companies with limited resources would favor loans not exceeding the amount upon which the small 1 1 * loan rates would apply. It la significant to point out that a majority of consumer instalment loans do not create additional debts. In most cases the need for financial assistance exists before the family or the individual makes application for a loan. The fact can be gleaned from Table 2 7 , which gives the distribution of loans by intended use of loan funds, that approximately 75 Per cent of all personal finance company loans and the personal Instalment loans made by commercial banks enable the borrowers to discharge exist ing obligations. More than one-half of the loans made by credit unions enable their borrowers to discharge current obligations. Another equally important fact is that every dollar loaned in the consumer instalment loan market immediately finds its way into trade channels. Whether the loan is used to consolidate overdue obligations, to finance Im mediate obligations, or for other purposes, the money adds its impetus to the business currents of the community, and the whole economy feels the effect of the transaction. Some economists have indicated that consumer in stalment loans have an inflationary effect on our economy. The statement that the whole economy appreciates the effects of consumer instalment loan transactions is not intended to Imply that such loans are inflationary. li+2 Certainly the merchants who are able to liquidate overdue obligations benefit from such loans, but it does not fol low that such loans have an inflationary effect. It has previously been shown that approximately three-fourths of all consumer Instalment loans are for the purpose of meet ing almost unavoidable expenses. It seems unlikely that borrowing for such purposes tends to increase either the total demand for goods or the volume of deposits in com mercial banks. Borrowing by one individual from another does not have an inflationary effect. This Is actually what takes place In the case of practically all credit union lending the workers are borrowing from their fellow employees. In like manner, personal finance companies obtain the major portion of their loan funds by the sale of stock. Such borrowing does not increase the amount of demand deposits or of money in circulation. Factual evidence points definitely to a negative conclusion regarding the Inflationary effects of consumer instalment lending. In Chapter II annual data were present ed correlating consumer instalment loans and national income. Net increases or decreases from year to year in consumer instalment loan outstandings are so small as compared with national income that they must be consid ered of very minor importance. Consumer instalment loans. 1U3 and for that matter the entire field of consumer credit, accompanies cyclical movements In general business activ ity rather than causing business fluctuations. Although there are differences in opinion regarding the Importance of consumer credit in economic fluctuations, the weight of opinion is that its Influence is limited. 2 5 Data compiled by Holthausen, commented on by Cox,^ and adapted by Haberler,^ illustrate the. view that consumer credit fluctuations are not as important as some econom ists have believed. Beckman's more recent studies5 bear out these earlier conclusions. D. M. Holthausen, The Volume of Consumer Instal ment Credit. 1929-1938. (New York: National Bureau o£ Economic Research, I9J+O), p. 1 0 1 . 3 Reavis Cox, The Economics of Instalment Buying, (New York: The Ronald Press Company, 1914-8 ), p • I4J.J4.* k ^ Gottfried Haberler, Consumer Instalment Credit and Economic Fluctua11one. (New York; National Bureau of £Tconomlc hesearoil, \$^2 ), p. 1^9 • S T. N. Beckman, "Federal Regulation of Consumer Credit,* Proceedings of the National Conference on Con sumer Credit. l9lio ancT"1^5^• CHAPTER VI ANALYSIS OP LOAN ACCOUNTS CHARGED OFF AS LOSSES Many persons have the erroneous belief that the field of consumer instalment loans is marked by a high proportion of loans which must be charged off as losses since the borrowers either can not or will not repay their obligations. Such is not the case. With every Institution included in this study, less than one per cent of consumer instalment loans had been charged off as losses. For this reason, an examination of loan accounts charged off as losses concerns only a very small percentage of the consumer Instalment loans granted by the principal lending institutions. This analysis, however, was made in anticipation of uncovering factors which de serve more careful attention by lenders in the field of consumer instalment financing. Analysis of Loans Charged Off as Losses by PersonaX FTnance Companies Personal finance companies operating in sixteen states charged off only l*i* per cent of the total number of loans and 1*0^ per cent of the total amount of loans granted during I9 5 O. This information, by states, is pre sented in Appendix E» These figures include loans made 11* 114-5 by all personal finance companies and are not limited to the large multi-unit organizations which are the particu lar subject of this Investigation. It would be expected that these percentages would be slightly higher than for multi-unit organizations since the latter operate some what more efficiently than all personal finance companies taken as a whole• After it is demonstrated that a very small percent age of accounts is charged off as loss, the explanation Is sometimes given by those uninitiated to the consumer credit field that consumer instalment lenders "hound the poor borrowers to death" to collect the accounts. Again, this is contrary to the facts. It is believed that only two institutions included in this study follow a collection policy which Is too strict for the best Interests of the borrowers. Prom the experience of other consumer instal ment lenders it Is obvious that too strict a collection policy Is unnecessary and also works to the disadvantage of the lender. One of the two institutions which followed too strict a collection procedure was a commercial bank and the other was a personal finance company. These two companies do not engage In practices which could be referred to as "unscrupulous," only unwise. The executives of both institutions felt that rigid standards had to be 1*4.6 maintained or the borrower would take advantage of the company* Such fears have not been borne out in the case of the other institutions included in this study* Suits* Possessions* and Sale of Chattels by Personal Finance Companies Table 30 presents an analysis of the cases in which legal remedies were used as a method of collection by per sonal finance companies operating in 1 7 states during 1950* These are the only states in which such information is required to be submitted by personal finance companies and is published by the supervisory agencies in the re spective states. In these 1 7 states personal finance companies made more than five million loans, yet insti tuted less than 21,000 suits* representing only four- tenths of one per cent of their loans. Of the 21,000 suits Instituted* approximately one-third were settled before judgment was rendered* There was a total of 10,915 possessions of chattels which had been pledged as security by the borrowers, repre senting only one out of every I4.77 loans made In these states. Seventy-seven per cent of these possessions was on automobiles* The necessity of maintaining community good-will makes possession and sale of chattels a hazard ous policy. The low resale value of chattels, especially m SUITS, POSSESSIONS, BY PERSONAL FINANCE COMPANIES 1 Suits, Possession, and # Sale of Chattels (California Colorado Illinois Iowa Kentucky Maryland Michiear Suits for Recovery: Suits for recovery pending at close of previous period 405 74 117 470 279 131 Suits instituted during period 820 467 330 957 735 2,667 Suits on which judgment was secured during period 398 321 1,904 185 527 492 2,153 Suits settled before judgment during period 418 68 170 136 279 95 288 Suits pending at close of current period 409 89 234 126 491 409 401 Wage Assignments Filed During the Period 85 95 15,055 431 21 89 Possession of Chattels Ob tained During Period: Household Goods 643 50 44 103 25 47 Autonobiles 2,875 433 306 288 274 1,482 Other Chattels and Property 75 28 919 4 12 10 23 Sale of Chattels by Licensee: Number of Accounts 3,175 366 942 276 535 280 1,427 Amount Due (in thousands of dollars) * 1,420 ♦ 52 $ 228 ♦ 50 $67 ♦ 52 ♦ 365 Amount Collected (in thousands of dollars) ♦ 818 $ 25 * 101 ♦ 27 ♦ 39 ♦ 34 ♦ 180 Number of Loans Granted During the Period 520,129 94,554 788,961 191,436 221,089 300,796 445,301 Source: Annual reports by state supervisory agencies* 4 A borromr's account nay appear under any one or all four of the classifications above* TABL8 30 SSESSI0N3, AKD SALE OF CHATTELS® COMPANIES OPERATING IN SEVENTEEN STATES 1950 t New hittn Minnesota Nebraska Hampshire New York Ohio Vermont Virginia Washington West Virginia Wisconsin Total 131 123 11 1,305 16 168 122 371 48 3,640 ,667 1,867 386 9 2,557 3,569 30 3,961 252 1,456 840 20,903 #153 257 250 3 1,918 3,285 2 2,109 111 1,348 323 15,586 288 1,597 67 5 544 238 36 1,786 165 93 517 6,502 401 136 84 5 1,400 46 8 234 98 300 48 4,518 89 8 3 2,692 6 29 9 333 155 19,011 47 4 33 31 192 2 8 51 58 5 1,296 •482 151 78 15 517 1,262 1 214 227 157 94 8,374 23 35 8 24 76 2 5 7 7 10 1,245 ,427 169 127 15 2,825 193 268 151 96 10,875 365 $38 $44 $2 $948 $44 $63 $28 $19 $3,420 180 $24 $21 $1 $523 $23 $42 $15 $8 $1,881 i 301 178,965 96,784 28,166 879,146 788,435 17,486 198,871 119,719 173,057 158,206 5,201,101 li*B household goods, also causes the lender to avoid fore closure whenever possible. With respect to the sale of all types of chattels, personal finance companies realized, on the average, only 55 P®r cent of the amount due on the loan in those cases where the chattels were sold by the licensee. Personal finance companies do not resort to legal remedies for collection of their consumer instalment loans except in very few instances. Those who believe that con sumer instalment lenders must exert extreme pressures on borrowers for collection of loans do not fully understand the consumer lending business nor do they appreciate the basic honesty and integrity of their fellow citizens. Scope and Method of Analysis of Loans Charged Off As~Uosses The practice followed in charging off loans as losses varies widely among lenders. A company which is extremely reluctant to write off a bad debt will show many uncollectible accounts. The more experienced lenders do not carry delinquent accounts as assets for any extended period, since delinquency expenses are often greater than charging off the account as a loss. In this study, all accounts charged off as losses involved loans which had entailed serious collection difficulties and In practical ly all cases were delinquent 90 days or more at the time 1 ^ 9 of the charge-off. In a few Instances loans were charged to profit and loss because of a change in the status of the borrower which definitely presaged a long interruption or a complete breakdown of the principal payments. An example of the latter would be the death of the borrower leaving no one legally responsible for the debt. Many institutions charged off consumer instalment loans upon the death of the husband and notified the wife that the loan had been cancelled. In the examination of loan accounts which had been charged off as losses, 23,282 such loans were Included. This analysis represents the actual number of loans charged to profit and loss by those Institutions Included and was not conducted on a sampling basis. In the case of all companies, except for two institutions which had retained their International Business Machine cards for charged-off accounts, manual tabulation of data was neces sary. The loan accounts analyzed were accounts which had been charged off during 1950 and 195^ an<^ were not neces sarily loans that had been granted during this period. Many of the loans had been made in prior years, but the charge-offs occurred during 1950 or 1951- was believed advisable to analyze all loans charged off as losses dur ing the period covered in this study rather than to con fine the analysis to loans which had been made during 1950 150 and 1951 since many loans granted during this period re main active for some time. For all factors analyzed, a comparison is made of the percentage of consumer instal ment loans granted with the percentage of loans charged off as losses. This method of comparison is used in preference to ratios of loans charged off to loans granted since the resulting ratios would be too small for vivid graphic presentation. Classification of Loans Charged Off As Losses By Size- oT the £oan A comparison is made in Table 51 and Chart XXI of loans granted by the principal types of consumer instal ment lending institutions with loans charged off as losses classified on the basis of the size of the loan. It would be expected that many charge-offs would be on loans of $100 or less, since frequently these accounts repre sent too much risk to justify larger loans. This was true of loans made by commercial banks and credit unions but was not true of loans extended by personal finance compan ies. Only 2.78 P«r cent of the personal instalment loans made by commercial banks was for $100 or less, yet 10.69 per cent of their charge-offs was caused by such loans. These small credit union loans of $100 or less, compris ing 52 per cent of all loans granted by credit unions. TABLE 31 CLASSIFICATION OF LOANS ON THE BASIS OF THE SIZE OF THE LOAN BY THE PRINCIPAL TYPES OF CONSUMER BSTAIMWT LENDING INSTITUTIONS COMPARING LOANS GRANTS) WITH LOANS CHARGED TO PROFIT AND LOSS 1950 — 1951 Personal Finance Coraercial Banks Credit Unions Per Cent Loans Per Cent Per Cent Loans Per Cent Per Cent Loans Par Cent All Charged of Charge All Charged of Charge All Charged of Charge Sise of Loan Loansa Offb Offs Loans* Offc Offs Loans4 Offd Offs $ 50.00 or Less 7.61 616 3.02 .13 1 .21 11.22 30 15.46 50.01 to $ 100 14.09 2,620 12.84 2.65 48 10.48 20.80 62 31.96 100.01 to 150 13.42 3,436 16.83 12.15 89 19.43 10.09 18 9.29 150.01 to 200 12.30 2,674 13.10 10.80 84 18.34 9.94 28 14.43 200.01 to 300 29.59 6,499 31.84 22.46 85 18.57 11.82 30 15.47 300.01 to 500 19.04 3,170 15.53 21.56 97 21.18 14.22 10 5.15 500.01 to 750 2.33 717 3.51 14.16 29 6.33 6.78 4 2.06 750.01 to 1,000 1.36 644 3.16 5.86 7 1.53 6.01 4 2.06 Over $ 1,000 .26 ..,•17 10.23 JL8 -2-J23 ?.12 _8 V 12 Total 100.00 20,410 100.00 100.00 458 100.00 100.00 194 100.00 a Table 13. k Representing all loans charged to profit and loss by eight personal finance conpanies. c Representing all personal instalment loans charged to profit and loss by six ccenercial banks. Representing all loans charged to profit and loss by five credit unions. 152 CHART XXI CLASSIFICATION OF LOANS ON THE BASIS OF THE SIZE OF THE LOAN BY THE PRINCIPAL TYPES OF CONSUMER INSTALMENT LENDING INSTITUTIONS COMPARING LOANS GRANTED WITH LOANS CHARGED TO PROFIT AND LOSS 1950 - 1951 P|» f i * ! 153 accounted for 1+7 #U2 per cent of their loans charged to profit and loss. Of all loans granted by personal finance companies 22 per cent was for $100 or less; however, only 15,86 per cent of their loans charged off as losses was for $100 or less. The greatest proportion of personal instalment loans of commercial banks which was charged to profit and loss was loans of $200 or less. Such loans accounted for only one-fourth of all personal instalment loans granted by commercial banks, but represented nearly one-half of all loans charged off as losses. The same tendency was true of credit unions. Personal finance companies, however, did not charge off a greater proportion of these loans of $200 or less than the proportion of such loans granted. Forty-eight per cent of the loans granted by personal finance companies was for $200 or less and I4.8 per cent of their charge-offs was on these size loans. It would seem from this information that personal finance companies are more adept in the granting and collecting of smaller loans. Although credit unions made a larger proportion of loans of $100 or less than did personal finance companies, they experienced an unusually large proportion of their charge-offs in this size classification. For loans of more than $5^0, in the case of both 1514- commercial banks and credit unions, a much smaller pro portion of such loans was charged to profit and loss than the proportion of such loans granted by these two types of institutions. This was not true of the loans charged off as losses by personal finance companies. It is believed this is largely explained by the separation of clientele which the three principal types of lenders are serving. Although this separation of markets is by no means as distinct as many writers h0ve Indicated, the fact the personal instalment borrowers of commercial banks on the average have monthly incomes much higher than the borrowers of personal finance companies would be particu larly advantageous in the collection of larger loans. Classification by Types of Security of Loans Charged OTf as Losses A comparison by types of security of consumer in stalment loans granted by the principal types of lending institutions with loans charged off as losses Is presented In Appendix P and graphically shown In Appendix G. The distribution of charge-offs and the distribution of loans granted in each security classification are so similar that it is not believed advisable to examine the security factor In detail. The similarity in the distribution of loans and charge-offs by security classifications was 155 particularly true in the case of personal finance companies and commercial banks. With both institutions the only deviation worthy of mention is in the classification "unsecured notes." As would be expected, a slightly higher proportion of unsecured loans was charged off as losses than the proportion of unsecured loans granted. In the case of credit union loans charged off as losses, three classifications by type of security should be noted. These are: unsecured notes, chattels on auto mobiles, and wage assignments. The reason unsecured loans deserve attention is because a much larger proportion of unsecured loans was charged off as compared to the proportion of unsecured loans granted by credit unions. With the other principal lenders there was a relatively small per centage difference between unsecured loans granted and unsecured loans charged off; however, credit unions ex tended less than three per cent of their loans on an un secured basis, yet 22 per cent of their charge-offs was caused by such loans. Regarding "chattel mortgages on automobiles," credit unions had excellent experience. Each type of lending institution charged off an approximate equal proportion of loans secured by chattels on automobiles; however, credit unions granted more than twice as large a proportion of their loans secured by chattels on automobiles as did i$6 the other lenders. It was also Interesting that one-third of the loans charged off by credit unions was secured by wage assignments. In many cases where charge-offs were necessary the borrowers had left their former jobs and the credit unions were unable to collect the accounts in spite of the wage assignment. Classification by Contractual Maturity of Loans Charged. 07f as Losses A clas. ification by contractual maturity of loans granted by the principal types of consumer instalment lend ing institutions and loans which had been charged to profit and loss Is presented in Appendix H and graphically shown In Appendix I. The length of the loan contract Is not a major factor in the granting of consumer instal ment loans nor Is it an important factor in charge-off analysis. Other factors are much more Important than length of loan contract* As an over-all picture, the three principal types of consumer instalment lending Institutions followed the same general pattern with respect to their charge-off exper ience by contractual maturity of loans* A greater pro portion of loans having contractual maturities of less than 12 months was charged off as loss as compared to the proportion of such loans granted* This is explained by 157 the fact that the shorter maturity classifications are usually associated with smaller loans and quite often poorer credit risks* Personal finance companies and credit unions also had a higher ratio of charge-offs as compared to the ratio of loans granted for loans having a 12-month length of loan contract. For all loans of 12 months or longer, commercial banks had a smaller ratio of charge-offs contrasted with the percentage distribution of such loans. In the 13-to l8-month maturity classification the experience of each of the lenders was similar in that a smaller proportion of these loans was charged off as loss than the proportion of such loans granted. In the maturity classification, 1 9 months and longer, personal finance companies did not have as favorable experience as the other lenders. Classification By the Occupation of Borrowers Of Loans Charged OfT^aa Losses A comparison of the occupation of borrowers of con sumer instalment loan funds with the occupation of borrow ers of loans charged to profit and loss is presented in Table 32 and depicted in Chart XXII. For loans of person al finance companies classified by occupation of borrowers the percentage distribution of charge-offs in each cate gory is almost identical with the percentage distribution TABLE 32 COMPARISON OF THE OCCUPATION OF BORROWERS OF CONSUMER INSTAIMENT LOAN FUNDS WITH THE OCCUPATION OF BORROWERS OF LOANS CHARGED TO PROFIT AM) LOSS BI THE PRINCIPAL TYPES OF LENDING INSTITUTIONS 1950 - 1951 Personal Finance Companies Conmsrcial Banks Credit Unions 1Per Cent Loans Per Cent Per Cent Loans Per Cent Per Cent Loans Per Cent All Charged of Charge All Charged of Charge All Charged of Char® Occupation Group Loansa Of?5 Offs Loans3 Off0 Offs Loansa Orr Offs Craftsmen, Foremen, and Kindred Workers 23-73 3,688 17.94 32.22 64 14.25 10.81 6 2.73 Operatives and Kindred Workers 30.46 6,220 30.26 10.21 168 37.42 51.96 90 40.91 Laborers, Except Farm and Mine 11*36 1,840 8.95 .84 20 4.46 6.01 34 15.45 Clerical and Kindred 8.20 1,886 9.17 13.40 37 8.24 20.01 46 20.91 Sales Workers 3.51 1,004 4.88 8.80 38 8.46 2.26 12 5.45 Professional, Tech nical, and Kindred Wbrkers 2.83 547 2.66 5.27 16 3.56 .98 Managers, Officials, and Proprietors, Except Farm 9*19 2,748 13.37 22.03 93 20.71 3.86 Farmers, Farm Manag ers, and Farm Laborers 1.14 22 7 1.10 .10 Service Woifcers, Pro tective, Domestic, and Others 7.23 1,928 9.38 2.96 11 2.45 4.07 28 12.73 Unemployed, Pensions or Independent In comes i— • 461 2.24 .25 Occupation Not Re ported 11 1.82 ______& 3_.92 _2 ______------Total 100.00 20,560 100.00 100.00 449 100.00 100.00 220 100.00 a Table 20. Representing all loans charged to profit and loss by eight personal finance companies. * c Representing all personal instalment loans charged to profit and loss by six commercial banks. ^ Representing all loans charged to profit and loss by six credit unions. 159 CHART XXII COMPARISON OF THE OCCUPATION OF BORROWERS OF CONSUMER INSTALMENT LOAN FUNDS WITH THF OCCUPATION OF BORROWERS OF LOANS CHARGED TO PROFIT AND LOSS BY THE PRINCIPAL TYPES OF LENDING INSTITUTIONS 1950 - 1951 3 Df* r 1 i v r * R t n d r f d C I r » u ! .ifld N > n r (* 0 S MClPfcrrs Pro * c % \ i A I , T ^ C * r * c A I jn j 0 M i C I .ll S * " S»* r V I i. N o r k f ra No I K f p o r t f d S o u rcc: T a D l e 160 of all personal finance company loans. In only two class ifications was a difference of more than three per cent observed. Proportionately fewer loans were charged off in the occupation group of craftsmen, foremen, and kindred workers and proportionately more loans were charged off in the occupation group of managers, officials, and proprietors than was true of the percentage distribution of loans granted to these two groups. There were wider variations observed in several of the occupation classifications of borrowers from both commercial banks and credit unions than was true of the borrowers of personal finance companies. Although there were five occupational groups in which differences of more than 3 P©** cent are noted between the percentage distribution of charge-offs and all loans granted by commercial banks, in only two groups is the variation significant. These occupation groups were (lj craftsmen, foremen, and kindred workers and {<£) operatives and kind red workers. In the craftsmen classification, commercial banks had excellent experience. In the operatives occupa tional group, commercial banks sustained more than one- third of their charge-offs even though this group comprised only one-tenth of their personal instalment borrowers. This latter tendency was not experienced by personal finance companies or credit unions. This particu- l 6 l lar deviation was greater than In the case of anv occupa tion classification for the three principal types of lenders. This fact should be an indication to the loan officials of personal Instalment loan departments of com mercial banks that the loan applications of operatives and kindred workers should be reviewed with more care. With respect to the accounts charged off as losses by credit unions classified by occupation of borrowers, only four groups deserve attention. These occupation groups are (1) craftsmen, foremen, and kindred workers, (2) operatives and kindred workers, (J) laborers, and (i|) service workers. In the first two groups mentioned, the craftsmen group and the operatives group, approxi mately 10 per cent fewer loans had to be charged off as losses, as compared to the proportion of loans granted to these workers, whereas the reverse was true in the two occupational groups, laborers and service workers. It might behoove credit union officials to review loan applications of laborers and service workers more care fully. The only occupational group in which the charge-off experience followed the same pattern for the three princi pal types of lenders was in the case of craftsmen, fore men, and kindred workers. Each type of lender had 162 excellent experience with, these skilled workers, judging by the small number of* charge-offs that were necessitated. In all other occupation classifications differences were observed among the principal lenders, although the devia tions in most Instances were not substantial. Classification by the Monthly Income of Borrowers of Loans Charged Off as Losses A comparison of the monthly Income of borrowers of consumer Instalment loan funds with the monthly income of borrowers of loans charged to profit and loss is presented in Table 33 and depicted in Chart XXIII. As would be ex pected, a much smaller proportion of charge-offs occurred In the higher Income groups than in the lower Income groups. This fact is more striking when compared to the percentage of loans granted to the higher Income groups. A change In the trend of the ratio of loans charged off as losses compared to the ratio of loans granted occurred near the monthly Income of $2^0 ^or the borrowers of personal finance companies and commercial banks and near the monthly Income of $300 for the borrowers of credit unions. Loans to borrowers above these monthly incomes had a much smaller proportion of charge-offs as compared to the proportion of such loans granted. Each of the principal lenders had the best exper- Floaso not*: Pagt X63 is lacking in urtirirg only. uMiyaasiTr h x c b q f h m s , i n c . TABLE 33 COMPARISON OF THE MONTHLY INCOME OF BORROWERS OF CONSUMER INSTALMENT LOAN FUNDS WITH THE MONTHLY INCOME OF BORROWERS OF LOANS CHARGED TO PROFIT AND LOSS BY THE PRINCIPAL TYPES OF LENDING INSTITUTIONS 1950 — 1951 Personal Finance Conmercial Banks Credit Unions Per Cent Loans Per Cent Per Cent Loans Per Cent Per Cent Loans Per Cent All Charged of Charge All Charged of Charge All Charged of Charge Monthly Income Loansa O f ? Offs Loans4 Offc Offs Loans4 O f ? Offs 00.01 to $ 100 1.01 637 3.27 .19 6 1.88 .04 100*01 to 150 4.02 1,860 9.54 2.10 16 5.00 •82 8 4.12 150.01 to 200 13.95 4,886 25.07 7.86 52 16.25 15.17 46 23.71 200.01 to 250 20.74 4,561 23.40 13.67 55 17.19 26.85 64 32.99 250.01 to 300 23.64 3,563 18.28 20.68 54 16.87 27.91 62 31.96 300.01 to 400 22.35 2,486 12.76 25.48 57 17.81 22.24 10 5.16 400.01 to 600 11.88 1,111 5.70 20.65 55 17.19 5.86 2 1.03 Over $ 600 2.35 129 .66 6.33 16 5.00 1.11 2 1.03 Not Reported .06 2.81 ... 216 1.32 -3*04 _ 2 Total 100.00 19,489 100.00 100.00 320 100.00 100.00 194 100.00 * Table 23- v Representing all loans charged to profit and loss by eight personal finance companies. c Representing all personal instalment loans charged to profit and loss by five commercial banks* M J Representing all loans charged to profit and loss by five credit unions. £ 1 6 5 CHART XXUI COMPARISON OF THE MONTHLY INCOME OF BORROWERS OF CONSUMER INSTALMENT LOAN FUNDS WITH THE MONTHLY INCOME OF BORROWERS OF LOANS CHARGED TO PROFIT AND LOSS BY THE PRINCIPAL TYPES OF LENDING INSTITUTIONS I9SO - 1951 M R CIRT J/A*SS I I & Undo r 4100.31 $140.01 $.<00.01 *<40.0 < bJOO.Ot $000.01 Ouor Hot $100 to to to to $$00 Rotor tf s s koars Ci-if;-; tr Profit an ; Lone 166 ience, as measured by the ratio of loans charged off compared to the ratio of loans granted, in the monthly Income classification $ $ 0 0 ,01 to $i|.00. Credit unions had exceptional experience with this group of borrowers; a difference of 17.08 per cent was recorded between the pro portion of loans granted and the proportion of loans charged off In this Income classification. It Is interesting that approximately the same number of commercial bank loans were charged off as losses In each of five monthly Income classifications. These in cluded borrowers with monthly incomes of more than $ 1 5 0 up to and Including monthly Incomes of $600. Unless a comparison Is made of the proportion of charge-offs and loans granted by commercial banks in each of these income classifications, one might conclude that the monthly in come of the borrower is not an Important factor In the selection of credit risks. To be sure, this Is not the case. Most of the personal instalment loans granted by commercial banks were to borrowers In the higher Income groups while the majority of loans charged off were loans granted to the lower income borrowers. The monthly in come of the borrower should be a major factor In the se lection of credit risks by all consumer Instalment lending institutions since the monthly Income primarily determines the ability of the borrower to repay the loan. 167 Classification by the Age of the Borrowers Of"Loans Charged 1Oti as Losses A comparison by age of borrowers of consumer Instal ment loan funds with the age of borrowers of loans charged to profit and loss Is presented in Appendix J and graphi cally shown in Appendix K. In each age classification the proportion of loans charged off generally follows the same pattern as the proportion of loans granted by each lending institution. As would be expected, a slightly greater proportion of loans was charged off than the proportion of loans granted to borrowers of less than 56 years of age; from an over-all point of view, however, the difference is rather small. The age factor is not as significant in the selection of credit risks as many of the other borrow er characteristics. Classification by the Sex and Marital Status of Borrowers ofTbans Charged Off as Losses With respect to the aex and marital status of bor rowers whose loan accounts were charged to profit and loss, several interesting facts as well as differences among the principal lenders may be detected from Table 3 J4.. The consistent facts should be noted first. All lend ers had excellent experiences with married male borrowers TABLE 34 COMPARISON OF THE SEX AND MARITAL STATUS OF BORROWERS OF CONSUMER INSTAIMENT LOAN FUNDS WITH THE SEX AND MARITAL STATUS OF BORROWERS OF LOANS CHARGED TO PROFIT AND LOSS BY THE PRINCIPAL TYPES OF LENDING INSTITUTIONS 1950 — 1951 Personal Finance Commercial Banks Credit Unions Per Cent Loans Per Cent Per Cent Loans Per Cent Per Cent Loans Per Cent Sex and Marital All Charged of Charge All Charged of Charge AH Charged of Charge Status Loans* O f ? Offs Loans* Offc Offs Loans* O f ? Offs Single Men 13.96 1,005 17.18 9.96 135 39.13 14.74 44 20.00 Single Women 3.46 255 4.36 15.45 25 7.25 13.32 36 16.36 Married Men 77.91 4,460 76.24 68.08 180 52.17 62.62 102 46.37 Married Women. 2.22 6.51 17.27 ^4._62 _ 1 2 2 - M? „ 2t2 Total 100.00 5,850 100.00 100.00 345 100.00 100.00 220 100.00 a Table 27. b Representing all loans charged to profit and loss by four personal finance companies. 168 c Representing all personal instalment loans charged to profit and loss by five commercial banks. Representing all loans charged to profit and loss by six credit unions. 169 as measured by the proportion or such loans charged to profit and loss compared to the proportion of such loans granted. All lenders had less favorable experience with single male borrowers. If the single classifications are combined and the married classifications are combined, each of the principal Instalment lenders had far fewer charge-offs as compared to the proportion of loans granted to married persons than to single persons. Married men appear to be better credit risks than single men and, although the tendency Is not as pronounced, all married borrowers appear to be better credit risks than single borrowers• A comparison of male and female borrowers reveals that personal finance companies had slightly better ex perience with female borrowers, commercial banks had much better experience with female borrowers, while credit unions had better experience with male borrowers than with female borrowers. The more favorable experience in the case of women borrowers from commercial banks appears to be statistically significant. Classification by Intended Use of Loan Funds of Loans Charged Off as Losses Table 35 and Chart XXIV present a classification of loans by Intended use of loan funds by the principal types of consumer instalment lending Institutions compar- TABLE 35 CLASSIFICATION OF LOANS ST INTENDED USE OF LOAN FUNDS BY THE PRINCIPAL TIPS OF CONSUMER INSTAIASJT LENDING INSTITUTIONS COMPARING LOANS GRANTED WITH LOANS CHARGED TO PROFIT AND LOSS 1950 - 1951 Personal Finance Companies Commercial Banks Credit Unions Per Cent Loans Per Cent Per Cent Loans Per Cent Per Cent Loans Per Cent All Charged of Charge All Charged of Charge All Charged of Charge Intended Use Loansa Off0 Offs Loansa Offc Offs Loans8 Off0 Offs Pay a personal fi nance company loan .79 264 4.31 1.96 15 3.28 6.16 8 3.64 Consolidate overdue bills 27.24 516 8.42 24.70 166 36.32 11.03 36 16.36 Refinance present note 3.38 2,772 45.23 2.74 33 7.22 2.55 Medical, hospital, dental, funeral 18,91 288 4.70 14.66 83 18.16 10.57 40 18.18 Clothing, food, rent,» fuel, moving expense 10,18 195 3.18 9.36 25 5.47 4.75 38 17.27 Taxes, mortgage, in terest, insurance 5.80 71 1.16 3.45 19 4.16 2.35 16 7.27 Home furnishings and appliances 2.69 140 2.28 6.76 10 2.19 8.90 10 4.55 Travel, vacation, education 7.21 111 1.81 2.93 11 2.41 3.22 12 5.46 Automobile expense 3.95 887 14.47 5.27 28 6.12 20.29 16 7.27 Home repair and improvement 7.71 236 3.85 3.05 3 .66 6.60 14 6.36 Business needs 3.54 156 2.55 6.77 52 11.38 1.32 2 .91 Buying home or real estate .02 4 .07 .39 3 .66 4.87 Assist relatives 3.71 39 .64 .17 3 .66 .50 10 4.55 Miscellaneous 4.87 449 17.79 _6 1.31 16.89 _18 8.18 Total 100.00 6,128 100.00 100.00 457 100.00 100.00 220 100,00 a Table 28. k Representing all loans charged to profit and loss by five personal finance companies. c Representing all personal instalment loans charged to profit and loss by six conmercial banks. ^ Representing all loans charged to profit and loss by six credit unions. 171 CHART XXJV CLASSIFICATION OF LOANS BY INTENDED USE OF LOAN FUNDS BY THE PRINCIPAL TYPES OF CONSUMER INSTALMENT LENDING INSTITUTIONS COMPARING LOANS GRANTED WITH LOANS CHARGED TO PROFIT AND LOSS 1950 - 1951 * • .» ,:St i)f i Okn I UMJS i I i t *■ ijp bill1 ’irdM'.il,* w *♦' *.*I rtff't-il. ( ' O it . ^ U ^ I * * 0 * - " <1 •’ ■ 0<*r m ’ oM1 *i H1, tn ti* ro st* i S *j r j ft <_ O H-*r ly^iSirgH a" .1 too 1 i i' s r A * <' I . t k A t i O * . •' T U < t t « O *■ o»o 0 t I •• • s s " Pr (* s • q or rra! rstltf ••11 s l t 1 I arroui < s x 3-5* 172 ing loans granted with loans charged to profit and loss. In the case of personal finance companies, in only three classifications were a higher proportion of loans charged off as losses than the proportion of loans granted. These purposes were (1) refinance present note, (2) automobile expense, and (3) pay another personal finance company loan. In only 3*58 P©r cent of loans granted by personal finance companies was the major purpose of the loan to refinance the present loan of the borrower, whereas 14.5 * 2 3 per cent of loans charged off as losses by personal finance companies was for this purpose. On that part of the loan where no new money was granted by personal companies to those borrowers whose major purpose of the new loan was to refinance their present loan, the lenders In many cases probably had little if any choice as to the granting or refusing of the loan application. It appears, however, that it often would be a better policy to grant an extension of time, if such action seems necessary, rather than to grant new loan funds to those borrowers from personal finance com panies when the major purpose of the new loan Is to re finance the existing loan. The pattern of charge-offs for commercial banks and credit unions followed rather closely the pattern of 173 loans granted, classified by intended use of loan funds. Contrary to the experience of personal finance companies, commercial banks experienced a large number of their charge-offs for those loans which had been granted for the purpose of consolidation of overdue obligations. Con trary to the experience of the other two principal lenders, credit unions charged off a higher proportion of loans granted for the purposes of "clothing, food, rent, fuel, and moving expenses" than the proportion of such loans to the total of all loans granted. Credit unions also charged off a higher proportion of loans which had been granted for the purposes of "medical, hospital, dental, or funeral expense" than the proportion of such loans grant ed. Again, contrary to the charge-off experience of personal finance companies and commercial banks, only 7 per cent of loans granted by credit unions for the pur pose of automobile expense was charged off although one- fifth of the loans granted by credit unions was for this purpose. Prom the analysis of charge-offs by Intended use of loan funds only one classification would seem to be partic ularly significant and then for only one of the principal lenders. The classification, "refinance present note" deserves more careful attention by personal finance comp anies. Entirely too large a proportion of charge-offs is 17U accounted for by this one classification, yet very few loans are granted where the borrowers state this as being the major purpose of the loan funds. Classification by New. Present, and Former Borrowers of~Eoans Charged Off as Losses Table 36 presents a comparison of new, present, and former borrowers of consumer instalment loan funds with the new, present, and former borrowers of loans charged to profit and loss by the principal types of lending in stitutions. Each of the principal lenders had a higher proportion of charge-offs to new borrowers than the propor tion of loans granted to new borrowers. This would be as expected since the lenders have not had previous credit experience with new borrowers. In the case of loans made to present borrowers, personal finance companies had approximately the same ratio of charge-offs as the ratio of loans granted to these borrowers. Commercial banks made only ^7 P®** cent of their loans to present borrowers; however, {4.5 per cent of their charge-offs was caused by these borrowers. The experience of credit unions concerning present borrowers was just the reverse from that of commercial banks. Credit unions grant ed more than one-half of their loans to present borrowers and only one-fourth of their charge-offs was caused by 4 TABLE 36 COMPARISON OF NEW, PRESENT, AND FORMER BORROWERS OF CONSUMER INSTALMENT LOAN FUNDS WITH THE NEW, PRESENT AND FORMER BORROWERS OF LOANS CHARGED TO PROFIT AND LOSS BY THE PRINCIPAL TYPES OF IENDING INSTITUTIONS 1950 — 1951 Personal Finance Commercial Banks Credit Unions New, Present, Per Cent Loans Per Cent Per Cent Loans Per Cent Per Cent Loans Per Cent or Farmer All Charged of Charge All Charged of Charge All Charged of Charge Borrower Loans a Of? Offs Loan^ Of? Offs Loan^ Of? Offs New Borrowers 20.62 5,102 26.33 33.28 80 40.00 33.20 108 53.73 Present Borrowers 65.37 12,850 66.30 26.84 90 45.00 53.11 54 26.87 Former Borrowers 1^.01 39.88 J O 15.00 13.69 J 2 I9.4O Total 100.00 19,381 100.00 100.00 200 100.00 100.00 201 100.00 a Table 32. Representing all loans charged to profit and loss by eight personal finance companies. c Representing all personal instalment loans charged to profit and loss by three commercial banks. ^ Representing all loans charged to profit and loss by five credit unions. 176 loans to present borrowers. Both personal finance companies and commercial banks had excellent experience concerning the relative ratio of charge-offs made to former borrowers, although the experience of credit unions was not so favor able • Before concluding this chapter it should be emphas ized that less than one per cent of all consumer instalment loans granted by the companies included in this study was charged off as losses. The outstanding fact regarding charge-off experience is that under careful loan administra tion the proportion of consumer Instalment loans charged off is extremely small for all size loans, for all types of security, for all lengths of contract, and for all classes of borrowers. This discussion was presented for the purpose of comparing the loan characteristics and the characteristics of borrowers of those accounts charged off as losses with the characteristics of all loans granted by the principal types of consumer instalment lending institu tions • The major characteristics of the borrowers that have been analyzed are by no means the only Important fact ors that must be taken into consideration by loan officials In the granting of consumer Instalment loans. For example, two other factors that are very important are the length of time at present employment and the length of 177 time at present address. In the analysis of loans charged to profit and loss by the principal types of consumer in stalment lending Institutions, it was found that 5^*39 per cent of the charge-offs of personal finance companies, 1+1*79 Per cent of the charge-offs of commercial banks, and 33*^5 P©r cent of the charge-offs of credit unions, repre sented loans made to borrowers who had a length of present employment of one year or less. It was further revealed that 55*11+ Per cent of the charge-offs of personal finance companies, 5 6 . 2 5 per cent of the charge-offs of commercial banks, and 7 5 . 0 2 per cent of the charge-offs of credit unions represented loans made to borrowers who had lived at their present address two years or less. Although length of time at present employment and length of time at present address were not recorded for all loans granted by the principal types of lenders, It was found on the basis of the few companies where this information was re corded that the above percentages concerning accounts charged off were considerably higher than the proportion of loans granted to such borrowers. Any lender who wishes to reduce further the number of charge-offs may do so by Inaugurating more rigid credit standards which will probably result In decreased collec tion troubles and decreased volume of business. In light of the small ratio of losses, such action would not appear 178 to be justified in the present day loan market. If a lender relaxes his credit standards, his collection prob lems increase, but he also enjoys an increase in his volume of loan business. If credit standards are relaxed, the most important factor is the effect on profits. Will the increase in volume and gross revenue offset the increase In collection problems and the Increase in accounts charged off as losses? When the credit policy of the lender is to be altered, all possible results must be taken Into consideration, particularly the effect on net profits. CHAPTER VII SUMMARY AND CONCLUSIONS Credit Is associated with confidence. Consumer credit has often been spoken of as "man's confidence in man." This phrase has often been repeated but its significance has been appreciated by few. Fewer still realize that this confidence in our fellow man is a basic explanation of our American way of life, as well as a partial explanation of the tremendous progress this country has made since the turn of the century. The part that consumer credit has played in the advancement of our country should not be underestimated. The dreams many of our European brothers have in their childhood of a fine home, a new automobile, an electrically equipped kitchen, vacations without worry, are more than dreams for American youth. What is the difference? Is it because of our vast natural resources, our constantly improving factory methods, our free enterprise system, our institutions of higher learning? To be sure, these are important factors, but they do not provide the full explanation. The evolution of business transactions has been described by the German economist Hildebrand as involving three stages of development: barter, money, and credit.1 1 ------Bruno Hildebrand, "Naturalwirthschaft, Geldwlrthschaft und Creditwlrthschaft," Jahrbficher fur Natlonal&konomle und Statistlk. Jena, lBb^, V o l . 2, pp. 1-21*. 179 180 The third stage is a vary lata development which many countries or the world have not even yet fully attain ed. This means that throughout the centuries most people have been able to buy only what they could pay for out of their savings, which were rarely enough for more than necessities. The introduction of consumer credit meant a placing of trust in the honesty and ability of men. This was still considered an experiment even as late as the 1 9 3 0 's, but it was an experiment which proved successful in the vast majority of cases. Although the majority of the American wage earners cannot save enough cash at one time to purchase many of the products which they would like to have, our merchants and our workers have learned that many of these products can be purchased out of current income. "Confidence in man" has thus given a new impetus to the whole American economy. Consumer instalment loans are only one phase of in stalment credit. The volume of instalment sales credit is much larger than the volume of consumer instalment loans. To an important extent, however, consumer instal ment loans are a supplement to instalment sales credit. The consumer may borrow a part or all of the amount re quired for the purchase of goods from one of the consumer instalment lending institutions. The field of consumer instalment loans is representative of more confidence 181 being placed In our fellow human beings than the field of consumer Instalment sales credit. To those unacquainted with the credit field. It Is difficult to understand the extent of the trust that Is being successfully placed in their fellow citizens. It Is almost impossible for many people to realize that more than a fourth of all consumer instalment loans are (granted on a completely unsecured basis; that, for instance, a person may enter many of our financial Institutions and borrow several hundred dollars entirely without security, if he Is a worthy credit risk. The skeptical might suppose that a large percentage of such "character* loans must eventually be charged off as losses. The facts are otherwise. It Is not a high degree of uncollectibility that chiefly characterizes the lending of small sums of money, but rather the high level of expense Incident to such activity. The services that the consumer instalment lending Institutions render to the community are very Important. Cash instalment credit is Justified by its ability to satisfy human wants. Cash loans are used to meet emer gencies and other needs when current income or accumulated savings fail to provide for them. It has been shown that a large proportion of borrowers of consumer Instalment loans are in urgent need of immediate funds in order to cope with emergency situations. Such loans must and will 182 be granted. If they are not granted by lawful lenders at fair rates of interest thay will be granted by unlawful lenders at unreasonable rates. Instalment credit is of economic utility to the consumer because it permits him to stabilize his flow of satisfactions through the process of pledging future Income for present wants. A large proportion of consumer instalment loans is made for the purpose of consolidation of overdue obliga tions. Instead of creating new debt, these loans merely convert debts already Incurred into Instalment form. Such loans not only permit the borrower to retain his credit rating and self respect, but also provide the merchants of the community with cash funds for those accounts hith erto considered doubtful. Payment of these past-due ac counts delights all concerned, re-establishes good-will, and provides an Impetus to the economy of the community. Although the accounts were past due, the placing of such accounts on a monthly payment schedule results, in the vast majority of cases, in complete repayment of the debt. That the American wage-earner will work harder, produce more, and provide his family with what in the past were considered the luxuries of life when he has definite monthly obliga tions is a truism well established in the minds of most persons who have studied the credit field. The history of cash Instalment lending Indicates 185 that this method of providing for the satisfaction of con sumer wants Is socially desirable. By the turn of the twentieth century many reformers believed that existing laws controlling small loans were not adequate. Abuses in contract requirements, contract enforcement, and interest charges continued despite legislative effort to curb these practices. The early philanthropic loan agencies that were established were useful but hopelessly inadequate to supply the consumer demand. The early studies financed by the Russell Sage Foundation were used as a basis for re considering the concept of regulation. As information accumulated concerning the consumer instalment lending field, the need for special regulation was recognised. The rate of charge would have to be increased above the usury maximums established for commercial loans in order to attract the supply of capital. In return for permis sion to charge a rate higher than that permitted by the usury laws, personal finance companies were required to submit to licensing and examination of their loan trans actions. Abuses in security assignments and collection procedures were prohibited. Penalities were established to encourage adherence to the law. Analysis of recent studies made in states which do not have adequate consumer finance laws causes one to be much more appreciative of the contribution that legitimate l&k lenders mske to our society. Discussion of what might happen without licensed lending is not just theoretical. It is based on what is taking place in those areas of the country where state legislatures have not made adequate provision for consumer lending on a lawful basis. Even though there are some states in which no progress seems to have been made since 1 9 0 0 . in most states the borrower has a far greater variety of agencies to choose from than ever before, lower charges to pay. and better legal protection. Illegal lenders never disappear com> pletely. but the extent to which they have been eliminated is a result of the tremendous growth of consumer instalment lending agencies. These agencies must be credited with having lowered rates, created an amazing volume of mass credit and purchasing power, and brought the consumer loan operation "out Into the light of day." Competitive Status of the Principal Consumer Instalment Lending Instl^utions All of the principal consumer instalment lending Institutions have increased their dollar volume of loans since the late 1920(s. The relative positions of each of the principal lending Institutions have changed significant ly during this period of growth. The most important change has occurred In the commercial banking field. Commercial banks were comparatively insignificant lenders of consumer 185 instalment loans in 1 9 2 9# however, today they are the most Important consumer instalment lenders as measured by loan volume. Personal finance companies, formerly the principal source of consumer instalment loans, are today the second most important institution. Credit unions came from an obscure position to occupy the third place in volume of consumer Instalment loans. In the field of personal instalment loans, commer cial banks have greatly increased their volume of loans, but the relative position occupied by commercial banks and personal finance companies has not changed substan tially since 1929> Personal finance companies today, as formerly, occupy the first position. These two princi pal instalment lenders account for approximately two-thirds of the total volume of personal instalment loans. Credit unions advanced to third position in the personal instal ment loan market as they did in the consumer Instalment field. Since the average size loan made by personal finance companies is typically much smaller than commer cial bank or credit union loans, personal finance companies extend a great many more individual loans than do the other lenders. As to the number of establishments which each of the principal lenders has in operation, credit unions exceed the other lenders. Second in Import ance in this respect are personal finance companies, fol- 186 lowed by commercial banks. Each or the principal types or consumer instalment lending institutions is important and make a derinlte contri bution to society. Each type or lending institution competes with the other types tor a certain segment or the consumer loan market, but the area or competition is not nearly as important as the ract that all or the major types or lenders are essential. Commercial banks can not and have not ade quately served all consumers as has been vividly shown in those states which have repealed their small loan laws. To illustrate, when the Missouri consumer credit laws were invalidated by - the new Constitution or 19k3» volume or consumer instalment loans in the Missouri banks should have increased very rapidly. Legitimate personal rinance companies were driven rrom the state. Actually, however, the Increase in the dollar volume or consumer Instalment loans in Missouri banks was at a less rapid rate than in banks throughout the country. Credit unions make a derinlte contribution, but their service is limited to members or the particular credit union. Personal rinance companies serve the largest segment or the population; nevertheless, they are not capable or ruirilllng the needs* or all consumers. Each type or lending Institution makes its contribution. To gether they have brought respect to the Industry and compe- 18? tition among lenders has forced greater efficiency within the industry. Loan Characteristics The two most important loan characteristics are the size of loans extended and the security required by the lenders. Commercial banks are primarily Interested in the larger personal Instalment loans whereas personal finance companies make the majority of their loans in amounts of less than $ 5 0 0 . Loans of more than $500 account for more than 50 per cent of the personal Instalment loan activity of commercial banks, while these larger loans comprise less than four per cent of the loans made by personal finance companies. The average size of personal instalment loans of commercial banks analyzed in this study was $53U*^7» compared to an average size loan of for credit unions and only for personal finance companies. There are many factors controlling the size of loans made by the different lenders, but the most Important factor for personal finance companies is the maximum loan limita tion Imposed by the laws of the various states. Basic economic changes that have occurred since the late 1 9 5 0 's emphasize the need of increasing the loan maximums for personal finance companies. Loan limits should not be regarded as rigidly fixed, but should be considered In re lation to the economic conditions of the period in question. 188 Although the value or the security pledged by the borrowers or consumer instalment loans is relatively ion im port ant in the rinal determination or the loan, It Is or interest to know what major types or security are required by the principal lenders. Chattel mortgages on household goods were the predominant type or security accepted by personal Tinance companies, chattel mortgages on automo biles and wage assignments were preferred by credit unions, whereas unsecured notes were accepted ror 65 per cent or the personal instalment loans extended by commercial banks. Personal rinance companies granted more than ^5 Per cent or their loans on an unsecured basis while less than three per cent or credit union loans were unsecured. For the loans that were secured, roreclosures and suits were very uncommon ror all or the principal lenders. Characteristics of the Borrowers of Consumer Instalment Loan E*uncls The occupations. Incomes and ages of the borrowers from the principal consumer Instalment lending institu tions are spread over a large and varied field. However, from the data presented regarding the major characteris tics of borrowers, it is evident that commercial bankers prefer to make loans to well established persons. This is evidenced by the major occupations represented as well as the monthly Incomes and ages of the borrowers from 189 commercial banka. Commercial banks make the majority or their loans to craftsmen, foremen and kindred workers, and to managers, officials, and proprietors. Such borrowers have relatively higher monthly incomes and, as a group, are older than those in the other occupations represented. Personal finance companies more widely serve all occupations of the civilian working population than do the other principal lenders. Consequently, the monthly in comes and the ages of their borrowers are more representa tive of our entire population. A major proportion of the loans granted by personal finance companies is to the lower income borrowers. Credit unions make more than 60 per cent of their loans to the occupational groups designated as operatives and clerical workers. Since there are many young people employed in these occupations, the average age of credit union borrowers is lower than that of borrowers from the other principal lenders. The average monthly income of the borrowers from credit unions is approximately the same as that of borrowers from personal finance companies but much lower than the income of commercial bank borrowers. As the income of the borrower increases, his stand ard of living is raised and a larger loan is often needed. For this reason, there is a definite tendency for the size of the loan to increase as the monthly income of the 190 borrower increases though not commensurately. An Important part of the market research program for any company la the attempt to learn more about their ultimate customers. A consumer Instalment lender by the very nature of his operations must know and identify all his customers and maintain adequate records concerning them. Consumer lenders know the names of their customers, where they live, their occupations, their incomes and many other items of detailed information. Consequently, all of the consumer lenders have information about their custo mers which vendors of goods pay thousands of dollars an nually to obtain through market research methods. Marketing research information may be applied to the whole area of selling a particular lender's services. Such a program should include the development of information about: present and potential customers, loan policies and services desired, the effectiveness of promotional methods, costs associated with various services and types of customers, and the services and appeals used by competing institutions. Although all of the institutions included in this study have information in their loan records which would give them an accurate profile of their customers, relatively few are actually making any use whatsoever of this data. There is also an almost total disregard by most of the consumer instalment lenders of the information 191 contained on the written loan applications or both re jected loan applicants and of loan accounts which had been charged off as losses. Although most of the information contained on the written loan application la useful, it is believed that some of the detailed information requested by lenders is useless. Where this is the case, such loan applications should be revised. On the other hand, there are some items of informa tion not requested by many lenders which could be put to valuable use. Examples are length of time at present employ ment and the length of time at present address. The answers to these two questions are perhaps as Important as any in the final determination of the loan. It is hoped that this study has suggested some positive ways in which the 'valuable market research in formation contained on loan applications may be put to practical use by lenders rather than being shamefully wasted as has so often been done in the past. Conclusions The major conclusions reached from this two-year study are as follows: 1. Consumer Instalment lending is a necessary econom ic activity. In our present-day economy, the need is even greater than formerly. The average American family spends nearly all that It earns and saves little. This Is caused largely by the higher standard of living among wage earners and the lower purchasing power of the dollar. 192 More than a fourth of our spending units have no liquid assets to fall back on In time of stress. This positive need for consumer loans will be met by someone and should be fulfilled by licensed lenders operating under state or federal supervision. 2. Consumer Instalment lenders provide assistance to the family In meeting unexpected demands for cash arising from illness, accident, death, temporary loss of work, or other emergencies. The lenders also help to keep the borrower solvent or credit-worthy by consolidating over due obligations. There are many other equally useful purposes for which loans are granted. Consumer instalment lenders assist the borrower In preserving family pride and enable him to meet obligations without losing his Independence or credit. 3* Consumer instalment loans properly extended are safe investments. Although co-makers or chattel mortgages are often required, and the ability to repay the loan Is determined by the borrower1s income, the real security for consumer instalment loans is character. If.. Consumer instalment lenders are reputable business organisations rendering service to the family in need of credit and earning a legitimate business profit for this service. 5 . Uniformity among commercial banks and credit unions Is suprisingly lacking. This is explain ed by the recent entry of many of these organizations In the consumer instalment lending field. Their newness to this field also accounts for the lack of skill among the executive personnel. Because of the lack of uniformity in their operations. It Is extremely difficult to draw meaningful conclusions in these two fields. On the other hand, personal finance companies are very similar in their operations. The larger institutions have been In this field for many years and their procedures are governed by more rigid laws than those of commercial banks and credit unions. 193 6. Personal finance companies were formerly con sidered the "poor man's banker.” Although they still serve the lower income groups, they also serve a much wider segment of the economic spectrum. The occupations and incomes of the borrowers from personal finance companies are representative of nearly every sphere of human endeavor. 7* Personal finance companies are exceptionally efficient in their operations, largely because they specialize in one field of finance. The more progressive companies are improving in efficiency each year. As a group, personal finance companies were found to be more efficient and progressive than either of the other principal types of consumer Instal ment lenders. In the credit union field, as well as in the consnerclal banking field, some institutions were efficient and progressive but many were extremely inefficient in their operations and followed an ultra-conservative lending policy. Consumer instalment lending is quite a different type of operation than com mercial lending and many banks are not equipped to do the former. Consequently, the majority of commercial banks either do not make consumer instalment loans or do so only under the most rigid conditions. Such requirements as five years employment at the same Job and real estate equity were found to be common. Many bankers further stated they limit the loan to not more than one month's income. 8. It is necessary that the monthly rate of charge for consumer instalment loans be high enough to permit profitable operation; however, it should not be so high that inefficient operators can survive or prosper. In those few states where the maximum rate of charge is above the amount needed to conduct a reasonably profitable lend ing operation, it would seem wise for the state or national association of personal finance companies to take the initiative In having the state legislatures lower the legal maximum rate. Personal finance companies would benefit by such action. 19k 9 . Under consumer loan legislation, loan limits should not be reg*rcled as rigidly fixed but should be considered in relation to economic conditions. In many states there is a definite need for larger loans than the legal maximums presently established. Based on the Intended use of loan funds as reported for more than six and one-half million individual loan transactions made by personal finance companies in states with a $300 loan maximum and in states with a larger loan celling, it is evident that a $300 loan will not satisfy the consumer need today. Brief examination of basic economic changes that have occurred since the $300 loan maximum was established in the late 1 9 3 0 's further emphasize the necessity of increasing loan maximums. By 1950 there was only approximately $ 1 7 5 purchasing power in a $ 3 0 0 loan. 10. Finally, and most important, in those states that do not have special small loan legislation, there is positive and urgent need for the immediate passage of the Uniform Small Loan Law. Without proper regulatory legislation borrowers are unable to protect themselves because of their lack of resources. When loan funds are made available through legitimate lenders at fair rates of charge there is no longer any need for the consumer to patronize “loan sharks." This study, it is believed, provides an improved in sight into the operation of the principal consumer Instalment lending institutions. For the particular institutions in cluded an accurate composite picture is presented of their borrowers and of the characteristics of the loans made to them. Because only large personal finance companies, com mercial banks, and credit unions were included, it is im possible to determine how representative the sample is of the activity of smaller consumer Instalment lenders through- out the nation. All evidence would tend to indicate that the sample is representative of the smaller personal finance companies and credit unions since both specialize in this one field of finance. On the other hand, it is doubtful that the sample is representative of smaller com mercial banks. As a group, smaller commercial banks are much more conservative than the banks included in this study. Each of the commercial banks studied had a separate instalment loan department and considered this phase of their banking to be important. 196 BIBLIOGRAPHY Books Beckman, Theodore N* and Robert Bertels, Credit And Collections In Theory and Practice~m (New York; McGraw-Klll Book Company, Inc.; I9U9 ) Chapman, John h. and Associates, Commercial Banks and Con sumer Instalment Credit, (Hew York; National Bureau of Economic Research, Inc.; I9J-1O J Dauer, Ernst A., Comparative Operating Experience of Consum er Instalment Financing Agencies and Commercial Banks, (New York; National Bureau of Economic Research, Inc.; Donaldson, Elvin P., Personal Finance, (New York; Ronald Press Co.; 19U-B") Diirand, David, Risk Elements In Consumer Instalment Financing, (New York; National Bureau of Economic Research, Inc . ; 194-1) Foulke, Roy A. and H. V. 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Consumer Credit And Its Uses, (New York; Prentice-Hall; 193^ J Holthausen, D.M., Volume of Consumer Instalment Credit, 1929-193&, XNew York; National Bureau of Economic Research, Inc.; 19^0) Hubachek, F.B., Annotations on Small Loan Ljws, (New York; Russell Sage Foundation;~~193&) hing, W .I., The Small Loan Situation In hew Jersey, I929, (Trenton, New Jersey; New Jersey Industrial Lenders Association; 1 9 2 9 ) Neifeld, M.R., Personal Finance Comes of Age, (New York; Harper and Brothers; 1939") 197 Neifeld, M.R., The Personal Finance Business, (New Yorkj Harper and Brothers; 1935") Nugent, Rolf, Consumer Credit and Economic Stability, (New York; Russell Sage Foundation; 1939) Parker, Frank, Consumer Credit Course, (Philadelphia; University of Pennsylvania £ress; 1951) Prochnow, Herbert V,, ed., American Financial Institutions, (New York; Prentice-Hall, Inc” 195l") Robinson, Louis N. and Rolf Nugent, Regulation Of The Small Loan Business (New York; Russell Sage Foundation; 1935) Robinson, Louis N. and Maude E. Stearns, Ten Thousand Small Loans. (New York; Russell Sage Foundation; I930I Saulnier, R.J., Industrial Banking Companies and Their Credit Practices, fNew York; National Bureau of Economic Research; 19^4-0) Simpson, W.H., Small Loan Problems of the Carolinas, (Clinton, South Carolina; Presbyterian College Press; 19ij.l) Weaver, Findley, Oklahoma Small Loan Problem, (Oklahoma City; Bond Printing Company; 193^1 Young, R.A. and Associates, Personal Finance Companies and Their Credit Practices'; (New York; National Bureau of Economic Research, Inc.; I9I4.O) Pamphlets A Symposlum On The Small Loan Problem In Missouri, Missouri Law Review; School of Law of the University of Missouri, Columbia University; Volume 16, Number 5, June, 1951* American Investment Company of Illinois Prospectus, December 7. 19UB. 198 Annual Report On The Labor Force, 1950* U.S. Department of Commerce, Bureau of Census, Current Population Reports Labor Force, Series P-50, Number y i $ March 9 # 1951. 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Report of the Bank Commissioner For the State of Connecti cut, 194-0through 1950 Report of the Bank Commissioner For the State of Iowa, 19487“ 19497 and I99O Report of the Eank Commissioner For the State of Nebraska, I947T"1949, and' I95C) Report of the Bank Commissioner For the State of Oregon, 19487”19497 and 1950 Report of the Bank Commissioner On the Operations of Small Loan Companies, Pis count Loan Companies, Foreign Exchange Companies, and Collection Agencies For 'the State of Wisconsin, 19487 I9497 and 1950 200 Report of the Banking Bureau, Department of Business Regu lation, State of Rhode Island, 195°* 195^ Report of the Bureau of Banking of the Virginia State Corporation Commission, 19^8, 19ip9# and I95O Report of the Bureau of Loan Agencies For The Commonwealth of Massachusetts, 19i|-8, 19U9» and 1950 Report of the Commissioner of banking. Commissioner of Banking, State of West Virginia, 1950 Report of the Commlssloner of Banka, Department of Commerce, Banking Division, State of Minnesota, I9I4.9 and 1950 Report of the Department of Commerce, PI vis Ion of Secur ities, For The State of Ohio, I9I4-O" through 1950 Report of the Department of Finance, State of Idaho, 1 9 ^ 9 and 1950 Report of the Department of Financial Institutions of the State of Indiana, l^-B^ 19il9» and 1950 Report of the Department of Insurance, Division of Small Loans, I9I4.U, 19il9# and 1950 Report of the State Bank Commissioner, State of Colorado, 1^.9 and I95O Report of the State bank Fxaminer of hew Mexico, 1950 Report of the Superintendent of Banks For the State of hew York, Part II, 19*4-9 and I95O Report of the Supervisor of Banking, Department of Public Institutions, D1 vis ion of Banking, 1950 Report Upon Operations of Finance Companies Licensed Under The Personal Property Brokers Act and California Small Loan Act, Division of Corporations, Department 0? Tnves tment, State of California, l ^ B , i9h9* and 1950 Reports Filed by Small Loan Companies Licensed Under Article Sd-A, **l?nlform Small Loan Law,11 Administrator of7 Loan Laws For The State of Maryland, 19^8, I"9l|_9, a n d 1 95C) 201 Reports of Small Loan Licensees, State Banking Department, State of Mi chi gan, 191+9 and 195^ Small Loan Laws of the United States, (Jeffrey, Hew Hampshire; Poliak Foundation For Economic Research; November 1, 191*9) Small Loan Problem in Colorado, (Denver, Colorado; Bureau of Business And Social Research of university of Denver; 191+2) Special Report for the State Corporation Commiss ion of Pert- inent Fac~6s With~!Tespect to and Methods of Determin ing the Rate of Return To The Small Loan Bus iness, (Richmond, Va., Division of Purchase and Printing; 1 9 W Spe cial Report On Licensed Lenders, (New York; State of New York Banking Department; 191+6) Thirty-Eight Years of Small Loan Business In Oregon, (Portland, Oregon, The Oregon Association of Small Loan Companies, 1990) Townsend, Genevieve, Consumer Loans in Wls cons in, (Madison Wisconsin; Straus Printing Company; 1932) When People Need Money, (Washington, D.C.; American Associa tion of Small Loan Companies; I9I43) Periodicals Bell, R.A., "The Service Performed by Personal .finance Companies to the Unemployed," Personal Finance News, December 1931* Cox, Reavis, "Durable Goods, Instalment Buying And Economic Fluctuations," Social Science, Volume 22, Humber Ij., Octooer, 191+7 * Fowler, E.F., "The Licensed Lender," The Annals of the American Academy of Poli tlcal and Social Science, March 193&, PP*13T+-13tS* Nugent, Rolff, “Three Experiments With Small Loan Interest Rates," Harvard Business Review, XIX, 1933* PP* 33-1+6. 202 Persons, W.F., “The Small Loan Business,*1 American Economic Review, Supplement, March 1931» Vol. XXI, Nol T7 pp. lbl-197. Phelps, Clyde Yrf., “Consumer Finance Company Charges" The Journal of Marketing, April, 1952» PP* 3 9 7 “U ° & and July, r95^» PP* 22-36. , "Monopolistic and Imperfect Competition In Consum er Loans," The Journal of Marketing, April, 19i4lj-* 203 APPENDIX A (Table 37) SUMMARY OP SMALL LOAN LAWS SHOWING EFFECTIVENESS OP REGULATION. MAXIMUM LOAN LIMIT, MAXIMUM AT SMALL LOAN RATES, AND THE MAXIMUM RATE OP CHARGE PER MONTH Maximum at Effective Maximum Small Loan Maximum Rate Regulation Loan Limit Rates Per Month Arizona $300 #300 3 1/2% to $300 California No limit $300 2 1/ 2% to $100 {2% If security is in sured); 2% to $300; 5/6% to $5#0 00; no maximum above $5,uOO, Colorado $300 $300 3 1/2-2 1/2# at $150 Connecticut $500 $300 3% to $100; 2% to $300; 1/ 2% to $300; 12% a year 20 mos * from contract date. Florida $300 $300 3 1/25S to $300 Hawaii $300 $300 3 1/2-2 1/2# at $100 Idaho $300 $300 3% to $300 Illinois $500 $500 3 fa to $130; 2% to $300; 1% to $300 Indiana $500 $500 356 to $150; 1 1/2% from $130 to $500 Iowa $300 $300 3-2^ at $130 Kentucky $300 $300 3 l/2#-2 1/256 at $ 1 5 0 Where more than one rate Is given, the first rate is charged on a part of the balance up to a certain amount and the second rate on the remainder. Thus, in Connecticut, the maximum charge for a month during which the balance is $140 Is 3% of $100 plus 2% of $40# or $3-80. 204 Effective Maximum Small Loan Maximum Rate Regulation_____ Loan Limit Rates______Per Month* Louisiana #500 #500 3 1/2-2 1/2# at #130 Maine #500 #500 3-2 1/2# at #130; 23/ min. chg. Maryland #500 #500 3% to #300 Massachusetts #500 #500 2% to #300 Michigan #500 #500 3% to #50; 2 1/2* to #300; 3/4/o to #300 Minnesota #500 #500 3% to #300 Missouri No limit #400 #15 per #100 add on for 12 mos• instalment payments, or 2.218^ mo. on unpaid balances to #400; Q% per year above #400 Nebraska $1,000 #500 3fo to #150; 2 1/256 to #300; 3/4^ to #1,000 Nevada #1.500 #500 3% to #300; 1% to #1,300; #5 minimum New Hampshire #500 #500 2%; plus fees, in advance of #1 on loans up to #30, #2 on larger loans up to #300 New Jersey #500 #500 2 1/2% to #300; I/256 to #300 New York #500 #500 2 1/ 2% to #100; 2% to #300; 1/256 to #300 205 ’iduxiffitmi at Effective Maximum Small Loan Maximum Rate Regulation Loan Limit Rates Per Month Ohio $1,000 $300 3# to $150; 2% to • 300; 2/ 3% to $1,000 Oregon $300 $300 to $500 Pennsylvania $300 #300 3-256 at $150; 6% per year 18 mos. from contract date. Rhode Island $300 $300 $% to #300 Utah $300 $500 356 to $300 Vermont $300 #300 2 \/2%-2 l/kfo at $125 Virginia $300 #300 2 1/2^ to #300; 6?6 per year 23 mos, from contract date Washington $500 #300 3S& to #300; 1% to $500; $1 minimum West Virginia $300 $300 3 1/2-2 1/ 2% at $150 Wisconsin $300 $200 2 l/2%- 2-l% at $100 and $200 Partially Maximum at Effecti ve Maxi mum Small Loan Maximum Rate Regulation Loan Limit Rates Per Month New Mexico $5°0 #3°° °n loans of $50 or less; larger loans 3% to $150; 2% to #300; 1% to #500; $1 minimum, Oklahoma #300 #300 10^ a annum plus Initial charge of (max.#15) and monthly charge of 2% on unpaid balance (Max, #2 ). 206 Carge'I^,l"or™Wkolly Inoperative Lawa Maximum Rate Alabama 8$ a year Arkansas 10$ a year (usury law) Delaware 6$ a year discount, plus 2$ service chg; plus fines for delinquency District of Columbia 1$ a month to $ 2 0 0 Georgia 1 l / 2 $ a month to $^00 Mississippi 10$ a year; fees North Carolina 6$ a year; fees Tennessee 1 l / 2 $ maximum (6$ per year plus reimbursement for actual servi ces) Texas 10$ a year (usury law) Wyoming 3 l / 2 $ a month on ftl^O or less $1 recording fee; fee of $1 on loans of $50 or less No Small Loan Laws Kansas, Montana, North Dakota, South Carolina, South Dakota 207 APPENDIX B STATE LAWS REGULATING THE OPERATION OF PERSONAL FINANCE COMPANIES SHOWING THE EFFECTIVENESS OF THE STATUTES (as of June I, 1952) IOWA 1 I KifvhltM Y/ZZA / W i o W y t.jb r tiv r Larfrly mr WkaUy litoprrmtw- t am Km SmaB Imam Lama FIOTRJS 1 Source: Appendix A 208 APPENDIX C ALPHABETICAL INDEX OF OCCUPATIONS CLASSIFIED BY ELEVEN MAJOR OCCUPATION GROUPS Craftsmen, Foremen, and Kindred Workers Bakers Blacksmiths Bookbinders Boilermakers Brlckmasons, stonemasons, and tile setters Cabinetmakers Carpenters Cement and concrete finishers Compositors and typesetters Cranemen, derrickmen, and hoistmen Decorators and window dressers Electricians Electrotypers and stereotypers Engravers, except photoengravers Excavating, grading, and road machinery operators Foremen Forgemen and hammermen Furriers Glaziers Heat treaters, annealers, and temporera Inspectors, scalers, and graders, log and lumber Inspectors Jewelers, watchmakers, goldsmiths, and silversmiths Job setters, metal Lineman and servicemen, telegraph, telephone, and power Locomotive engineers Locomotive firemen Loom fixers Machinists mechanics and repairmen, airplane Mechanics and repairmen, automobile Mechanics and repairmen, office machine Mechanics and repairmen, radio and television Mechanics and repairmen, railroad and car shop Me chanics and repairmen Millers, grain. flour, feed, etc. Millwrights Mol de r s, me t a 1 Motion picture projectIoniats 209 Opticians and lens grinders and polishers Painters, construction and maintenance Paperhangers Pattern and model makers, except paper Photoengravers and lithographers Piano and organ tuners and repairmen Plasterers Plumbers and pipe fitters Pressmen and plate printers, printing Hollers and roll hands, metal Roofers and slaters Shoemakers and repairers, except factory Tailors and talloresses Tool makers, and die makers and setters Members of the armed forces Operatives and Kindred Workers Apprentice auto mechanics Apprentice bricklayers and masons Apprentice carpenters Apprentice electricians Apprentice machinists and toolmakers Apprentice mechanics, except auto Apprentice plumbers and pipe fitters Apprentices, building trades Apprentices, metalworking trades Apprentices, printing trades Apprentices, other specified trades Apprentices, trade not specified Asbestos and insulation workers Attendants, auto service and parking blasters and powdermen Boatman, canalmen, and lock keepers Brakemen, railroad bus drivers Chainmen, rodmen, and axmen, surveying Conductors, bus and street railway Deliverymen and routemen Dressmakers and seamstresses, except factory Dyers Filers, grinders, and polishers, metal Fruit, nut, and vegetable graders and packers, except factory Furnacemen, smeltermen, and pourers Heaters, metal Laundry and dry cleaning operatives 210 Meat cutters, except slaughter and packing house Milliners Mine operatives and laborers Motormen, mine, factory, logging camp, etc. Motormen, street, subway, and elevated railway Oilers and greasers, except auto Painters, except construction and maintenance Photographic process workers Power station operators Sailors and deck hands Sawyers Spinners, textile Stationary firemen Switchmen, railroad Taxicab drivers and chauffeurs Truck and tractor drivers Weavers, textile Welders and flame-cutters Laborers, Except Farm and m l ne Fishermen and oystermen Ciarage laborers and car washers and greasers Gardeners, except farm, and groundskeepers Longshoremen and stevedores Lumbermen, raftsmen, and woodchoppers Teamsters Clerical and Kindred Workers Agents Attendants and assistants, library Attendants, physician's and dentist's office Garagemen, transportation Bank tellers Bookkeepers Cashiers Collectors, bill and account Dispatchers and starters, vehicle Express messengers and railway mail clerks Mail carriers Messengers and office boys Office machine operators Shipping and receiving clerks Stenographers, typists, and secretaries Telegraph messengers Telegraph operators Telephone operators Ticket, station, and express agents Sales Workers Advertising agents and salesmen Auctioneers Demons trators hucksters and peddlers Insurance agents and brokers hewsboys Real estate agents and brokers Stock and bond salesmen Salesmen and sales clerks Professional, Technical, and Kindred Workers Accountants and auditors Actors and actresses Airplane pilots and navigators Architects Artists and art teachers Athletes Authors Chemists Chlropra ctors Clergymen Dancers and dancing teachers Dentists Deslgners Dietitians and nutritionists Draftsmen Editors and reporters Engineers, aeronautical Engineers, chemical engineers, civil Engineers, Industrial Engineers, mechanical Engineers, metallurgical, and metallurgists Engineers, mining Engineers Entertainers 212 Farm and home management advisors Foresters and conservationists Funeral directors and embalmers Lawyers and judges Librarians Musicians and music teachers Natural scientists Nurses, student and professional Optometrists Osteopaths Personnel and labor relations w o r k e r s Pharmacists and surgeons Radio operators Recreation and group workers Religious workers Social and welfare workers, except group Sports instructors and officials Surveyors Teachers Technicians, medical and dental Therapists and healers Veterinarians Managers, Officials, and Proprietors, Lxcept Farm Buyers and department heads, store Buyers and shippers, farm products Conductors, railroad Creditmen Floormen and floor managers, store Inspectors, public administration Managers and superintendents, building Officers, pilots, pursers, and engineers, ship Officials and aaminlstrators, public administration Officials, lodge, society, union, etc, Pos tmasters Purchasing agents and buyers Farmers, Farm Managers, and Farm Laborers Farmers (owners and tenants) Farm managers Farm foremen 215 Farm laborers, wage workers Farm laborers, unpaid family workers Farm service laborers, self-employed Service Workers. Protective, Domestic, and Others Attendants, hospital and other institution Attendants, professional and personal service Attendants, recreation and amusement Barbers, beauticians, and manicurists Bartenders Eootblacks Boarding and lodging housekeepers Charwomen and cleaners Cooks, except private household Counter and fountain workers Elevator operators Firemen, fire protection Guards, watchmen, and doorkeepers Housekeepers and stewards, except private household Janitors and sextons Marshals and constables Mi dw 1 ve s Policemen and detectives Porters Practical nurses Sheriffs and bailiffs Ushers, recreation ana amusement Walters and waitresses ’Watchmen (crossing) and bridge tenders Service workers, except private household Unemployed, Pensions or Independent Incomes Occupation Not Heported APPENDIX D (Table 38) Comparison Of The Sex and Marital Status of Borrowers of Consumer Instalment Loan Funds With the Sex and Uarital Status of Loan Applicants Rejected By The Principal Types of Lending Institutions 1951 Personal Finance Companies Commercial Banks Credit Unions Number Per cent Number Per Cent Nunfcer Per Cent Sex and Per cent of Loan of Loan Per cent of Loan of Loan Per Cent of Loan of Loan Uarital All Applic* Applic. All Applic. Applic. All Applic. Applic. Status Loans* Rejected ) Rejected Loans3 Rejected0 Rejected Loans3 Rejected Rejected Single len 13.3- U38 19.32 9.96 177 14.10 1U.7U 51 18.09 Single Women 3 . W 98 li.32 15.15 108 8.61 13.32 12 lu25 Married Men 77.91 1,693 7U.68 68.08 912 72.67 62.62 211 7U.82 Married Women U.67 38 1.68 6.51 58 U.62 9.32 8 2.81* Totals 100,00 2,267 100.00 100.00 1,2 55 100.00 100.00 232 100.00 b) From six personal finance companies c) From four commercial banks d) From three credit unions 215 APPENDIX E (Table 39) ANALYSIS OF CONSUMER INST ALIMENT LOAN BALANCES CHARGED OFF BY PERSONAL FINANCE COMPANIES 1950 (By Per Cent of Loans Granted) Per Cent of Per Cent of State Number Amount Charged Off Charged Off California 1 . 1 5 Colorado 2 .1*2 1.65 Connecticut 1.51* .91 Idaho 1 . 3 1 .86 Illinois 1 .1*1 .86 Indiana 1.30 .87 Iowa 1 .8b 1.06 Kentucky 1.55 I .27 Michigan 1.11 .66 Minnesota 1.58 1.25 Oregon .87 1.10 Vermont 1.22 • 74 Virginia 1.75 1.24 Washington 1.29 .91 West Virginia 1.51 1.52 Wisconsin .93 .60 Average Per Cent 1 .1*4 I .03 Source: Annual Report of State Regul atory Agency APPENDIX F (Table 4o) CLASSIFICATION OF LOANS BT TYPE OF SECURITY BY THE PRINCIPAL TYPES OF CONSUMER INSTALMENT LBiDING INSTITUTIONS COMPARING LOANS GRANTED WITH LOANS CHARGED TO PROFIT AND LOSS 1950 — 1951 Personal Finance Coananies Cosnercial Banks Credit Unions Per Cent Loans Per Cent Per Cent Loans Per Cent Per Cent Loans Per Cent All Charged of Charge All Charged of Charge All Charged of Charge Tyne of Security Loans& Of? Offs Loansa Off0 Offs Loansa Ofr Offs Chattel Mortgages: Household Goods 43.20 9,581 42.39 5.02 11 2.40 10.63 32 14.55 Automobiles 14.75 3,401 15.05 12.20 64 13*97 34.70 34 15.45 Other Goods 4.79 102 .45 1.03 4 .87 . a Unsecured Notes 25.62 9,227 40.82 65.27 344 75.11 2.66 48 21.82 Endorsed and/or Co-maker Notes 4.18 292 1.29 13.15 35 7.65 16.48 32 14.55 Wage Assignments 6.99 1 .01 29.57 74 33.63 Other Considera tions .47 3.32 5.55 Total 100.00 22,604 100.00 100.00 458 100.00 100.00 220 100.00 a Table 16, k Representing all loans charged to profit and loss by nine person ad finance companies. 216 0 Representing all personal instalment loans charged to profit and loss by six causer cial banks, d Representing all loans charged to profit and loss by six credit unions. 217 APPEKBIX 0 CLASSIFICATION OF LOANS BY TYPE OF SECURITY BY THE PRINCIPAL TYPES OF CONSUMER INSTALMENT LENDING INSTITUTIONS COMPARING LOANS GRANTED WITH LOANS CHARGED TO PROFIT AND LOSS I960 - 1951 P£ftSO*AL FINANCE CCKCRClAi CREDIT tyke Of SECURITY C d M P A M E S BANAS .Ml OMS *<**»! Fst+ite, J. j j Accounts 1 Other T T O 5 Assignments [n d ^ rs ^ C Of Co-HAliPf No y-x-x *%:X: 10. J 7 Unsecured Notes Chattel lt>.46 X*.*. . ^ . . .-X-X'V AutomoDi 1 e >v.v Hojsehotd ft Other Ooodi * ii.g« So ■'ce: C^i -i r :i =. - I to P r - f i t CHAR? XXV APPENDIX , H (Table 4l) CLASSIFICATION OF LOANS BY CONTRACTUAL MATURITY BY THE PRINCIPAL TYPES OF CONSUMER INSTAIMHiT LENDING INSTITUTIONS COMPARING LOANS GRANTED WITH LOANS CHARGED TO PROFIT AND LOSS 1950 — 1951 Personal Finance Companies Comnercial Banks Credit Unions Per Cent Loans Per Cent Per Cent Loans Per Cent Per Cent Loans Per Cent Length of All Charged of Charge All Charged of Charge All Charged of Charge Loan Contract Loans* Offh Offs Loans* Offc Offs Loans4 Off4* Offs 6 Months or Less 3.11 877 5.00 4.26 59 12.61 33.37 68 30.91 7 — 11 Months 1.64 473 2.70 1.27 45 9.61 18.87 72 32.73 12 Months - 8.45 2,985 17.03 63.64 269 57.48 9.76 40 18.18 13 — 18 Months 54.56 5,465 31.17 26.97 87 18.59 28.02 32 14.54 19 Months and Longer Terms 32.24 7,731 44.10 3.86 8 1.71 8 3.64 Total 100.00 17,531 100.00 100.00 468 100.00 100.00 220 100.00 a Table IS. b Representing all loans charged to profit and loss by seven personal finance companies. 218 c Representing all personal instalment loans charged to profit and loss by seven comnercial banks. ^ Representing all loans charged to profit and loss by six credit unions. 219 a p p e n d i x i CLASSIFICATION OF LOANS BY CONTRACTUAL MATURITY BY THE PRINCIPAL TYPES OF CONSUMER INSTALMENT LENDING INSTITUTIONS COMPARING LOANS GRANTED WITH LOANS CHARGED TO PROFIT AND LOSS 1950 - 1951 P ■ C i » ' o ► l a * * s Co<*»irjink r ci i *1 CHART XXVI APPENDIX J (Table 42) COMPARISON OF THE AGE OF BORROWERS OF CONSUMER INSTAIMENT LOAN FUNDS WITH THE AGE OF BORROWERS OF LOANS CHARGED TO PROFIT AND LOSS BY THE PRINCIPAL TYPES OF LENDING INSTITUTIONS 1950 — 1951 Personal Finance Companies______Coaeercial Banks Credit Unions Per Cent Loans Per Cent Per Cent Loans Per Cent Per Cent Loans Per Cen1 All Charged of Charge All Charged of Charge All Charged of Chart Age of Borrower Loans* orb Offs Loans* Off® Offs Loans* Off® Offs Under 21 yrs. .11 .01 4.61 4 2.53 21 yrs. to 25 yrs. 10.97 1,080 I8.46 6.62 51 12.78 19.02 30 18.99 26 yrs. to 30 yrs. 19.23 1,260 21.54 13.90 74 18.55 16.50 44 27.85 31 yrs. to 35 yrs. 17.56 1,080 18.46 16.60 69 17.29 20.29 26 16.46 36 yrs. to AO yrs. 14.82 825 14.10 15.23 55 13.78 12.90 22 13.92 41 yrs. to 45 yrs. 12.16 580 9.92 15.04 45 11.29 6*48 6 3.80 46 yrs. to 50 yrs. 10.63 415 7.09 14.62 25 6.27 8.22 12 7.59 51 yrs. to 55 yrs. 7.78 290 4.96 9.43 40 10.02 7.12 10 6.33 56 yrs. to 60 yrs. 4.91 225 3.85 6.07 20 5.01 3.65 4 2.53 Over 60 yrs. 1.83 1.62 2.48 20 5.01 1.21 Total 100.00 5,850 100.00 100.00 399 100.00 100.00 158 100,00 a Table 26. k Representing all loans charged to profit and loss by four personal finance companies. 220 c Representing all personal instalment loans charged to profit and loss by six conmercial banks. d Representing all loans charged to profit and loss by four credit unions. 2 2 1 A P P E N D H K COMPARISON OF THE AGE OF BORROWERS OF CONSUMER INSTALMENT LOAN FUNDS WITH THE AGE OF BORROWERS OF LOANS CHARGED TO PRO FIT AND LOSS BY THE PRINCIPAL TYPES OF LENDING INSTITUTIONS 1950 - 1951 P I ft C f * T Personal ‘ mance Co« par i ■ Corircrr i 'l tar Its ini C r a r j ~ J t? f r-!f it -I. - l "ss Under Ivor i I » ” it> t r s AbC OF JOflSOdfRS Sourer: */ CHART XXVIT 222 APPENDIX L (Table *3) SUMMARY OF CREDIT UNION LAWS SHOWING THE UNSECURED LOAN LIMIT AND THE SECURED LOAN LIMIT BY STATES 1952 State Unsecured Loan Limit Seoured Loan Limit ______or Maximum Loan Alabama Set by Directors Set by Directors Arizona Set by Directors Set by Directors Arkansas Set by Directors $ 1 0 0 0 California # 5 0 0 $3000 or X 0 % assets Colorado Set by Directors Set by Directors Connecticut # 5 0 0 $ 2 0 0 0 or IO56 assets Delaware No credit union law Dlst# of Columbia $50 Set by Directors Florida Set by Directors Set by Directors Georgia Set in By-Laws None Idaho Set by Directors Set by Directors Illinois $ 5 0 0 $ 2 5 0 0 Indiana $1 0 0 , assets to $ 2 5 0 0 0 $ 5 0 0 assets less *2 0 0 ,assets to $ 5 0 0 0 0 than $ 5 0 0 0 $3 0 0 , assets over IO56 of assets with $ 5 0 0 0 0 assets of $ 5 0 0 0 but less than $ 1 0 , 0 0 0 Q% assets with assets from $ 1 0 to $ 2 5 0 0 0 assets - assets from $ 2 5 to $ 5 0 0 0 0 6 % assets - assets from $ 5 0 to $ 1 0 0 0 0 0 5 # assets - assets $ 1 0 0 to $2 5 0 , 0 0 0 ll% assets - assets # 2 5 0 - $ 5 0 0 , 0 0 0 Maximum $20,000 If assets are over $ 5 0 0 , 0 0 0 222 APPENDIX L (Table 43) SUMMARY OF CREDIT UNION LAWS SHOWING THE UNSECURED LOAN LIMIT AND THE SECURED LOAN LIMIT BY STATES 1952 State Unsecured Loan Limit Secured Loan Limit ______or Maximum Loan Alabama Set by Directors Set by Directors Arizona Set by Directors Set by Directors Arkansas Set by Directors $ 1 0 0 0 California $ 5 0 0 $ 3 0 0 0 or 1 0 # assets Colorado Set by Directors Set by Directors Connecticut $ 5 0 0 $ 2 0 0 0 or 1 0 # assets Delaware No credit union law Dlst. of Columbia $ 5 0 Set by Directors Florida Set by Directors Set by Directors Georgia Set in By-Laws None Idaho Set by Directors Set by Directors Illinois $ 5 0 0 $ 2 5 0 0 Indiana $1 0 0 , assets to $ 2 5 0 0 0 $ 5 0 0 assets less $2 0 0 ,assets to $ 5 0 0 0 0 than $ 5 0 0 0 $5 0 0 , assets over 1 0 # of assets with $ 5 0 0 0 0 assets of $ 5 0 0 0 but less than $1 0 , 0 0 0 8# assets with assets from $ 1 0 to $ 2 5 0 0 0 7 # assets - assets from $ 2 5 to $ 5 0 0 0 0 6 # assets - assets from $ 5 0 to $ 1 0 0 0 0 0 5# assets - assets $ 1 0 0 to $2 5 0 ,0 0 0 k# assets - assets $ 2 5 0 - $ 5 0 0 ,0 0 0 Maximum $20,000 if assets are over $5 0 0 ,0 0 0 22J State Unsecured Loan Limit Secured Loan Limit or Maximum Loan I ova #50 10% of ass#ts Kansas $ 5 0 0 1 0 % of assets Kentucky ♦200 Set by Directors Louisiana $500 $ 5 0 0 or 1 0 % of capital Maine #300 Set by Membership upon recommendation of Directors Maryland $300 Set In By-Laws and by Directors Massachusetts $ 1 0 0 fkOOO $8000 if secured by real estate Michigan Set by Directors Set by Directors Minnesota Set by Directors Set by Directors Mississippi # 5 0 Set by Directors Missouri ♦joo $1000 or 1 0% of assets Montana Set by Directors Set by Directors Nebraska $ 5 0 0 20 times the members shares Nevada No credit union law New Hampshire Set by membership Set by membership or by-laws or by-laws Nev Jersey $100 $1000 New Mexico Set by Directors Set by Directors 22k State Unsecured Loan Limit Secured Loan Limit or Maximum New York t5 0 plus shares 3# of paid in shares klOO, assets #25000 or # 7 5 0 with # 3 , 5 0 0 s2 0 0 -assets # 5 0 0 0 0 Maximum. Assets over pOO-assets #100000 #5 M. limit of #5000 Uj.00-asseta #1 M. or If secured by real flj000-assets #2 M. estate limit of #10000 North Carolina #50 Set in By-Laws North Dakota ♦50 # 2 0 0 or 1 0 # of capital and surplus Ohio #100 Set by Directors Oklahoma Set by Directors Set by Directors Oregon bl5 0 # 1 0 0 0 or 1 0 # of p O O assets of capital flOOOOO Fenna yl vania Set in By-Laws Set In By-Laws Rhode Island Set by Directors Set by Directors South Carolina #500 Set by Directors South Dakota No Credit Union Law Tennessee #50 Set in By-Laws Texas Set by Directors # 2 0 0 or 1 0 # of capital and surplus Utah # 5 0 0 plus shares # 3 0 0 0 - 1 5 # of the capital and surplus after # 2 0 0 0 of assets Vermont #500 Set by Directors Virginia #100 Set in By-Laws Washington # 5 0 0 * 5 0 0 0 State Unsecured Loan Limit Secured Loan Limit or Maximum Loan West Virginia $50 Set by Directors Wisconsin *100 Set by Directors *500 With approval or board and banking commissioner Wyoming No credit union law Federal Credit Uni on Law $14.00 1 0 % of assets 226 AUTOBIOGRAPHY I, Winnie David Robbina, was born in Flemlngton, Missouri, January 11, 1923. I received by secondary school education In the public schools of Denton, Texas. My undergraduate training was obtained at North Texas State College, from which 1 received the degree Bachelor of Science in 1943. From Northwestern University I received the degree Master of Business Administration in 1947. From 1947 to 1950 I managed a small manufacturing plant producing office supplies and during the same period was teaching in the Department of Business Administration of North Texas State College. From 1950 to 1952 X attended The Ohio State University at whioh time I completed most of the requirements for the degree Dootor of Philosophy, with specialization in the field of Marketing. During the school year 1952-1953 I have held a position as Associate Professor at Rollins College.